Annual Report & Accounts
Trusted supporter of SMEs,
the heartbeat of successful economies
About Sage
We’re helping millions of SME customers to build successful businesses
through a deep understanding of their needs and of the markets in
which they operate.
Our innovative business software and first-class business support are
providing customers with the tools they need to achieve their ambitions
and grow.
We’re also delivering a new generation of products and services that combine
what customers love about Sage with the benefits of technology and more
flexible pricing models.
We have a clearly defined strategy to leverage our strengths and take advantage
of the changes taking place in our markets to accelerate our growth.
Delivering on our strategy for accelerated growth
– Organic revenue increased by 5% (2013: 4%), driven by an acceleration
in recurring revenue growth to 7% (2013: 6%)
–
Statutory revenue contracted by 5%, reflecting the disposal of non-core
products last year and adverse foreign exchange movements
– The move to higher quality software subscription revenue continues, with
a 29% increase in the organic annualised value of the software subscriber
base to £220m (2013: £170m)
– Underlying basic earnings per share (“EPS”) increased 8% to 22.69p. Statutory
basic EPS increased by 330% to 17.07p, reflecting the inclusion of a £186m
non-recurring loss on disposals in the prior year
–
Strong momentum for Sage One as a small business global cloud solution; it is
now present in 10 markets and paying subscriptions increased by almost 150%
in the year to 86,000 (2013: 35,000*)
* Following the incorporation of several existing SaaS products into the Sage One portfolio during the year, prior year
Sage One paying subscriptions have been restated on a like-for-like basis. Without the restatement, Sage One paying
subscriptions at 30 September 2014 were 52,600 (2013: 22,400).
Inside this report
Discover more about
Sage online
Visit www.sage.com
Strategic report
2014 highlights
2
Chairman’s statement
4
What we do
6
Where we operate
8
10
Performance review
12 Our business model
Governance
61 Chairman’s introduction to Corporate
governance
62 Board of Directors
66 Corporate governance report
14 Understanding our customers
24 Our strategy
36 Key performance indicators
40 Principal risks and uncertainties
44
Financial and operating review
50 Corporate responsibility
77 Directors’ remuneration report
93 Directors’ report
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Financial statements
99
Independent auditors’ report to the
members of The Sage Group plc
156 Independent auditors’ report to the
members of The Sage Group plc
104 Group financial statements
110 Notes to the Group financial statements
158 Company financial statements
165 Shareholder information
Financial highlights
Organic revenue growth
Underlying operating
profit margin
Underlying basic
EPS growth
5%
27.5%
5%
4%
4%
27.4%
27.3%
27.3%
27.5%
25.5%
8%
16%
14%
Underlying
cash conversion
107%
117%
111%
112%
107%
106%
2%
Flat
2010
2011
2011
2012
2013
2014
2010
2011
2012
2013
2014
2010
2011
2013
2014
2012
-2%
2010
2011
2012
2013
2014
12%
8%
About our non-GAAP measures and why we use them
Throughout the strategic report we quote two kinds of non-GAAP
measure; underlying and organic. We use these measures in
monitoring performance and incentivising management.
Underlying – underlying measures exclude certain recurring
and non-recurring items, and prior year underlying measures
are retranslated at the current year exchange rates to neutralise
the effect of currency fluctuations. You can read about what
the excluded items are by turning to pages 36 to 39 for our
KPI definitions.
Underlying measures allow management and investors to compare
performance without the potentially distorting effects of foreign
exchange movements, one-off items or non-operational items.
Organic – in addition to the adjustments made to underlying
measures, organic measures exclude part-year contributions from
acquisitions, disposals and products held for sale in the current
and/or prior years. This allows management and investors to
understand the like-for-like performance of the business.
Reconciliations
Reconciliations of statutory revenue, operating profit and basic
earnings per share to their underlying and organic equivalents
are in the Financial and operating review starting on page 44.
The Sage Group plc | Annual Report & Accounts 2014
1
Sage at a glance
We have a vision...
Our vision is to be recognised as the most valuable
supporter of small and medium sized companies
by creating greater(cid:98)freedom for them to succeed.
Discover more about Sage online
Visit www.sage.com
e b e n e f its of subscription
h
T
g t h e t e chnology opportu
nity
C a p t u ri n
c u s i n g our business
o
F
Rigorous
resource
and capital
allocation
...with a clear
strategy
We’re on track
to meet our
financial targets.
We’re committed to doubling
our long-term historic
average organic revenue
growth rate from 3% to
6% by the end of our 2015
financial year. We will also
deliver a(cid:98)100bps increase
in organic(cid:98)operating profit
margin(cid:98)to 28% over the
same period.
Turn to page 24 for a deeper
look at our strategy.
Turn to pages 36 and 37
to see how we’re measuring
our strategic progress.
...that delivers
solutions
Our solutions are targeted to
address customer needs.
We provide small and medium sized businesses
("SMEs") with a range of easy-to-use business
management software.
However, software is just the start.
We’ve been at the forefront of providing SMEs with
proactive business support alongside their software
product for many years. Our global network of
local experts is helping(cid:98)millions of customers to
overcome day-to-day business problems, giving
them the confidence and freedom to be successful.
...to the SME
market
We address the SME market by dividing it(cid:98)into
three segments because we recognise that
the needs and characteristics of a small
business differ from those of a larger business.
Our core products:
on-premise and in the cloud
Accounting
HR and payroll
ERP
Our connected services
Payments
CRM
Mobility
Business
intelligence
Turn to page 6 for more on
our products and services.
Mid-market
100 – 500 employees
Small to medium
sized businesses
10 – 200 employees
Turn to page 14 to read
about what’s important
to our SME customers.
Start-up and small businesses
0 – 20 employees
2014 highlights
A year of significant progress
Our progress in 2014 demonstrates we’ve made strategic and
financial progress. This momentum underpins our confidence
that we will achieve our organic revenue growth and organic
operating profit margin targets in 2015.
October 2013
Sage One Accounts Extra launched in the UK,
which broadens the appeal of Sage One to a wider
range of users with the introduction of multi-currency,
multi-user and multi-company capabilities.
Launch of Sage One Accounts in Canada.
November
Steve Hare announced as
Sage’s new Chief Financial
Officer, bringing significant
financial and operating
experience from his time at
Apax Partners and Invensys plc.
Steve Hare, Chief Financial Officer
May
Sage ERP X3 convention in Lisbon, Portugal,
where Sage ERP X3 version 7 is unveiled.
Sage’s former Chief Executive Officer Guy Berruyer
announces his intention to retire.
Sage reports organic revenue growth for the first
half of 2014 of 5%.
5%
Organic revenue
growth for the first
half of 2014.
April
Launch of Sage 100 Online in
France, our hybrid cloud solution
n
for French SMB businesses.
Launch of Sage One
in Switzerland.
June
Launched Sage Murano
Online Standard Edition
and Sage Murano
Payroll Online in Spain.
July
August
Sage Summit 2014 took place
in Las Vegas, where over 5,000
customers and business partners
were in attendance.
€16m acquisition of Exact Lohn, a payroll
business serving SMBs in Germany, is
announced to the market.
Announcement of our launch plans for Sage
ERP X3 Online, our global cloud solution for
mid-market businesses who want to move
their infrastructure to the cloud.
Stephen Kelly announced as Sage’s new
Chief Executive Officer, succeeding Guy
Berruyer on 5 November 2014.
Existing start-up and small business SaaS
products incorporated into Sage One family
in South Africa.
2
The Sage Group plc | Annual Report & Accounts 2014
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January 2014
Launch of first global brand campaign
across Europe, the US, Africa and
Australia, demonstrating how Sage
helps people around the world to
manage their business with confidence.
Drummond Hall joined Sage’s Board of Directors as a Non-executive Director.
Drummond brings extensive, broad-based marketing and corporate strategy
experience from his role as Chief Executive of Dairy Crest and from time spent
with Procter and Gamble, Mars and PepsiCo.
February
Commercial launch of a range of connected
services in North America, including Sage
Mobile Sales, Sage Mobile Service and
Sage Billing and Payments. Sage Report
and Sage Customer View mobile apps are
also launched in France.
Launch of Sage One Accounts in Portugal.
March
Inna Kuznetsova joined Sage’s
Board of Directors as a Non-
executive Director. Inna brings
a wealth of sales, business
development and marketing
experience to Sage from her
time at CEVA Logistics and IBM.
Launch of Sage 300 Online in
North America.
Inna Kuznetsova, Non-executive Director
September
$158m acquisition of PayChoice,
a provider of payroll and HR services
to SMB businesses in the US,
is announced to the market.
After the year-end
Launch of Sage Contaplus Flex in Spain.
Launch of Sage One in Brazil.
Launch of Sage View for Accountants
in North America.
Stephen Kelly, Chief Executive Officer
The Sage Group plc | Annual Report & Accounts 2014
3
Chairman’s statement
We remain on course to deliver the financial targets we have set for 2015,
with organic revenue growth of 5% and organic operating profit margin
of 27.5% reflecting continued progress towards our goals.
Nothing ever stands still at Sage. We have seen another
year of improved revenue growth in 2014 and have
made significant progress towards our aim of delivering
a step-change in both the level and sustainability of growth.
We remain on course to deliver the financial targets we have
set for 2015, reporting organic revenue growth of 4.9%
and organic operating margin of 27.5% for the year. The
acceleration of the move to subscription driving strong
recurring revenue growth demonstrates the quality of
this revenue growth.
We have appointed Stephen Kelly as Chief Executive Officer.
We will now drive the next phase of our strategy. We are
building on sound foundations.
by global breadth, delivery of a truly localised customer
experience and 24/7 support. At the other end of our size
spectrum, Sage ERP X3 continues to prove its attractiveness
as our global solution for mid-market customers.
We continue to transform the value we offer customers
by providing the benefits of online, connected and mobile
experiences. Importantly, we do this through powerful
technology that is non-disruptive for the customer, which
supports their progressive move to the cloud. Our disciplined
approach to portfolio management has seen investment
prioritised to these key initiatives at the expense of legacy
products. Effectively, the portfolio is self-funding the
investment in growth.
Our portfolio – modern, innovative solutions
addressing the needs of our customers
The key initiatives underpinning the strategy continue to
progress well. We are capturing the benefits of a more global
approach: “think globally whilst delivering locally.” Sage One
and Sage ERP X3, as global products, demonstrate this
change. Sage One is well established as our global cloud
solution for smaller businesses, differentiated in the market
Purposeful innovation is a feature across our portfolio.
We have built cloud solutions and brought them to market
across our three segments. We are investing in mobility,
with a focus on applications that bring value to all
our customers across a range of user requirements.
For example, for micro businesses, we have launched
the Sage One mobile app, whilst with Sage ERP X3
version 7, we have a mid-market solution with mobility
at its core.
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The Sage Group plc | Annual Report & Accounts 2014
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The Corporate
governance report
starts on page 66.
Read more about
the Board on pages
62 and 63.
Our work on modernising existing products means that
on-premise customers can benefit from mobility without
compromising their core solution. We are also investing in
remote collaboration, ensuring our customers can work
efficiently with their accountants and across their businesses.
Business model transition to drive
shareholder returns
There are many commentators who wonder how well Sage
can transition its business model to cope with the cloud.
Quietly, and without fanfare, Sage is doing this. By putting
customer needs at the heart of all we do, the Company is
showing in its rapid roll-out of cloud services, and related
features, its responsiveness to change. The Company also
has not forgotten its installed base of customers, not all of
whom want to travel on this journey at the same pace. In
offering customers choice in how they deploy their software,
combined with customer support which is second to none,
Sage is differentiated in the market. We consider customer
satisfaction is a better measure of progress than simple
cloud-based contract numbers.
Sage has built a subscription pricing capability that is making
a tangible difference in the business, with more to come.
Linking subscription to pricing, product and technology
initiatives has proven an effective strategy to drive strong
growth of Sage’s subscription base. The transition to a
subscription-based model creates a more active and more
valuable relationship with a customer for life. Subscription is
a key driver for Sage, supporting both our customer-centric
approach and our strategy for growth.
A focus on shareholder returns is at the heart of the
strategy. The Board believes that high-quality and sustainable
long-term revenue and earnings growth, combined with a
disciplined approach to capital allocation and progressive
dividend policy, will drive superior returns for shareholders.
In the past year, we have made new investment in payroll
software in the United States with the acquisition of
PayChoice. This acquisition strengthens Sage’s position in
payroll and HR services in the US and accelerates Sage’s
move to the cloud in this market. The acquisition is wholly
consistent with our strategy of putting customers at the
heart of what we do and provides greater service to our
core customer base. We will continue, in a disciplined way,
to seek such opportunities.
The Board
Early in the year, Guy Berruyer indicated his desire to
retire from the Company. In the 21st century, natural
retirement like this will become increasingly rare, and
it is to his credit that Guy has reached the end of his
17-year career with the Company happily in this manner.
He has made a major contribution to the Company and
has established platforms and structures that will last long
after he has retired. We all wish him well in his retirement.
Sage has only had three Chief Executives in its history
and I am delighted that Stephen Kelly joins us as the fourth.
He has a deep background in software success and in
understanding the needs of SMEs. Whilst, of course, he
will want to consider for himself Sage’s evolution, he has
indicated his support for the key pillars of the Company’s
strategy: increasing revenue growth through focusing our
business, capturing the technology opportunity, and gaining
the benefits of subscription. We welcome him to Sage.
We were also joined by Inna Kuznetsova, Drummond Hall
and Steve Hare on the Board during the past year. They
bring valuable and different perspectives to our deliberations.
Finally, on Board-related matters, Drummond Hall has
succeeded Ruth Markland as Chairman of the Remuneration
Committee with effect from 5 December 2014. Ruth remains
as Senior Independent Non-executive Director. I am grateful
for all her diligence as Chair of the Remuneration Committee.
In summary
It has been a year of further progress – strategically,
operationally and financially. There is, however, no
complacency, and in such rapidly changing markets we
continue to need to focus our energies on shorter decision
timelines, rapid deployment and strong customer focus.
We can only do this successfully with excellent people
and, on behalf of the Board, I would like to thank all our
employees and partners for their very considerable efforts
in the past year. I look forward with confidence to your
Company’s response to further changing customer
demands in the year ahead.
Donald Brydon, Chairman
The Sage Group plc | Annual Report & Accounts 2014
5
What we do
Our products and services
Our software is solving real business problems and harnessing the benefits
of new technology, whilst remaining simple, efficient and a pleasure to use.
However, Sage is about much more than just software.
We take the lead in foreseeing the implications of changes that will impact
SME businesses, particularly in relation to new legislation, and use this
understanding to deliver training and support to our customers that instils
them with greater confidence.
Core products
Accounting
Our accounting software gives our
customers total control over their
finances, invoicing and stock, and
provides clear visibility over their
profits, cash and financial position.
HR and payroll
Our HR and payroll solutions
are simple, secure and efficient,
helping our customers to remain
compliant and pay their employees
accurately and on time.
ERP
Our Enterprise Resource
Planning ("ERP") solutions are
designed to help customers
streamline, consolidate and
rationalise their business
operations and processes.
Connected services
CRM
Our integrated CRM software
helps our customers to maintain
more productive relationships
with their customers. This helps
to drive repeat business and more
effective up-selling.
Mobility
Our mobile applications give our
customers access to their data
anywhere and anytime, helping
them to stay in touch with every
aspect of their business.
Business intelligence
Our business intelligence
solutions are helping customers
overcome data complexity
and obtain greater insight into
their business so that they can
make more informed decisions.
Payments
Our payments businesses let our
customers take payments through
their websites, in person using
a card reader, or directly from
electronic invoices.
Our focus on integrating payments
into our core accounting and ERP
software means these transactions
are recorded automatically into our
customers’ systems, saving them
time and reducing the risk of error.
Support
We are in regular contact with our customers over the telephone or online.
We have over 30,000 conversations with them each day
on topics ranging from accounting queries and advice on
new legislation, to technical aspects of our software.
We also expand our support services during periods of peak
activity, such as during the tax filing season or when new
legislation comes into effect, to help our customers when
they need us most.
Turn to page 18 to hear more from the people who help
our customers every day.
6
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The Sage Group plc | Annual Report & Accounts 2014
The Sage Group plc | Annual Report & Accounts 2014
Our markets
Each of our segments has different characteristics and requirements, which
provides us with a range of opportunities to bring great products and services
to our customers.
Our annual Sage Business Index survey helps us remain close to what matters
most to SMEs across the globe by gauging their level of business confidence.
Almost 14,000 respondents now take part in the survey, and you can read
more about this year’s findings at www.sage.com/businessindex.
Start-up and small businesses (“SSB”)
Small to medium sized businesses (“SMB”) Mid-market businesses
0-20
employees
10-200
employees
100-500
employees
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68%
of total
customer base*
30%
of Group
revenue*
18%
of total
customer base*
34%
of Group
revenue*
3%
of total
customer base*
16%
of Group
revenue*
* Remainder derived from payments and accountants.
Routes to market
Direct
We sell direct to customers in most of
our major markets via local websites,
over the telephone and through specialist
field-sales teams.
Accountant partners
Accountants buy software from us to
help them run their practices, and over
48,500 accountant partners also recommend
our products and services to their clients.
Business partners and resellers
We benefit from a network of around
7
20,000 business partners, who act as an
important reseller channel and also provide
installation, training and support services
to businesses with more complex needs.
The Sage Group plc | Annual Report & Accounts 2014
The Sage Group plc | Annual Report & Accounts 2014
7
7
Where we operate
A global footprint built with local expertise
Sage has a presence in 23 countries and sells software all
over the world. Our established market positions provide
us with a strong platform to bring products and services
to both new and existing customers.
Localised customer experiences
One of Sage’s strengths is providing highly-localised software and support
to customers. We’re able to do this effectively because our teams are based
in-country, so they’re close to the business and legislative issues that affect
SMEs in these locations.
Rather than simply translating software into multiple languages, we build
our products so that they fundamentally reflect the interface, functionality
and legislative conventions a person would expect to see in their region.
Our ability and commitment to do this sets us apart from many other
software vendors.
Our global products
Whilst we’re focused on delivering highly-localised products, a key principle
of our strategy is to take a more centralised approach to developing global
product roadmaps so that we are more efficient, take advantage of our
scale, share best practice across our business and utilise our global talent
more effectively.
We therefore aim to perform the majority of development work for global
products through teams that may be centralised in a particular country
or region, and leave the remaining work to in-country teams who tailor
the product to meet the needs of the local market.
Two important examples are Sage One and Sage ERP X3.
Sage One
Sage One is our global cloud solution for start-up and small businesses.
Following its launch in the UK & Ireland ("UKI") in 2011, Sage One is
now commercially available in 10 countries including the US, Canada,
Germany, France, Spain, Portugal, Switzerland and South Africa.
The relatively recent launch of Sage One, together with its low monthly
subscription, means it is not yet a material contributor to Group revenue.
However, Sage One is an important product in helping us to grow market
share amongst start-up and small businesses.
The main Sage One development team is based in the UK. The architecture
of Sage One is modular so that regional development teams can build
functionality addressing local legislation that seamlessly plugs in to the core
product. Examples of these modules include quotations in France and debit
notes in Spain.
Sage ERP X3
Sage ERP X3 is our global ERP solution for the mid-market. It is sold in
over 100 countries, serves 228,000 users across 4,800 customers and
is supported by 290 business partners.
Sage ERP X3 is a sophisticated solution offering multi-currency, multi-
company, multi-language and multi-legislation support. The latest version
commercially available is Sage ERP X3 version 7, which is web-native
and incorporates a modern new user interface design. We have also
announced the planned release of Sage ERP X3 Online, which offers
our customers the benefits of greater customisation and control whilst
allowing them to deploy their infrastructure in the cloud.
This flexibility means Sage ERP X3 can truly address a global market.
Americas
Revenue £412m
Organic operating profit
£106m (25.7% margin)
3,585 employees
32%
Group revenue
Key products
Product
Market segment
Sage One
SSB
Sage 50 US and Canada SSB
SMB
Sage 100
SMB
Sage 300
Sage ERP X3
Mid-market
Sage Payment Solutions Multi-segment Payments
Product type
Accounting
Accounting
ERP
ERP
ERP
8
The Sage Group plc | Annual Report & Accounts 2014
Europe
Revenue £750m
Organic operating profit
£215m (28.6% margin)
7,114 employees
57%
Group revenue
Product type
Accounting and payroll
Accounting and payroll
Accounting and payroll
Accounting
ERP
ERP
ERP
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Key products
Product
Market segment
Sage One
SSB
SSB
Sage 50 in the UK
Sage Ciel in France SSB
Sage Contaplus
in Spain
SSB
Sage 100 in France SMB
Sage 200 in the UK SMB
Sage Murano
in Spain
Sage Offi ce Line
in Germany
Sage ERP X3
Sage Pay
SMB
SMB
Mid-market
Multi-segment Payments
ERP
ERP
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AAMEA
Revenue £144m
Organic operating profit
£39m (27.2% margin)
2,134 employees
11%
Group revenue
Key products
Product
Sage One
Sage Pastel
Sage VIP Payroll
Sage Micropay
Accpac ERP
Sage Handisoft
Sage ERP X3
Sage Pay
Market segment
SSB
SSB
SMB
SMB
SMB
Accountants
Mid-market
Multi-segment Payments
Product type
Accounting and payroll
Accounting and payroll
Payroll
Payroll
ERP
Accounting
ERP
Turn to pages
48 and 49
for regional
performance
commentaries.
There are an additional 142 employees based in centralised or Group functions (2013: 145).
The Sage Group plc | Annual Report & Accounts 2014
9
Performance review
On track to deliver the 2015 financial targets
“ I would like to thank Guy Berruyer for leading Sage to deliver
an encouraging set of results with a strong finish to the year.
I reconfirm the Board’s financial targets for 2015 and recognise
the 2014 results as an important milestone on the path to
meeting them. Our financial performance demonstrates
the strength of Sage’s global business and the quality of
relationships it has with millions of SME customers worldwide.”
Stephen Kelly
Chief Executive Officer
These results are important in demonstrating we are on track to achieve
our financial targets for 2015. Reporting organic revenue growth of 5%
(2013: 4%) and operating profit margin of 27.5% (2013: 27.1%) means
the Group remains confident of achieving the targets of 6% organic
revenue growth and organic operating profit margin of 28% in 2015.
Recurring revenue grew organically by 7% (2013: 6%), whilst organic
SSRS revenue contracted by 1% (2013: flat). The increase in recurring
revenue growth is a key feature of these results and reflected a strong
software subscription performance. Software subscription revenue grew
organically by 28%, reflecting acceleration in the second half on the 23%
growth reported in the first half. The recurring revenue growth and strong
software subscription performance are important indicators of the
underlying strength of the business and underpin confidence in the
improved growth trajectory expected for 2015.
Recurring revenue, which includes software subscriptions, payments
and support, now represents 73% of Group revenue (2013: 71%).
The continuing shift to a higher quality revenue mix reflects the increased
contribution from software subscription. The software subscription
contract base continues to grow, with over 450,000 contracts across
the Group.
The increase in organic revenue growth has been achieved despite
a weaker performance in payments, particularly in North America.
Improving the performance of payments and driving the number of
integrated payments customers remain key priorities, particularly as
they have performed below our expectations this year. Likewise,
underperformance in the mid-market in France continued as a drag
on growth. This was reflected in the lower full-year organic growth rate
of 7% (2013: 12%) reported for Sage ERP X3, our global solution for the
mid-market. Sage ERP X3 grew well internationally, however, delivering
20% growth outside of France. The ambition for double-digit long-term
growth for Sage ERP X3 remains.
The move to subscription is attractive for Sage and our customers as
it builds greater and more predictable revenue streams for the future.
By balancing subscription adoption across new and existing customers,
we are managing the potential near-term impact on revenue of the
transition to subscription. The opportunity we have with existing
customers around growing share of wallet, improving retention rates
and increasing recurring contract attachment, is helping us to manage
the near-term impact of subscription displacing licence revenue.
Our cloud solutions, core product modernisation initiatives and growing
portfolio of connected services are providing subscription catalysts for
all of our customers, regardless of whether their core system is on-premise
or in the cloud. Core product modernisation is a particularly significant
opportunity with the Sage installed based. It creates the flexible
architecture required to liberate customer data and make it available in
the cloud so we can deliver an enriched desktop experience enhanced
with connected services. Core product modernisation has been an
important catalyst in driving subscription across our portfolio in 2014.
Key highlights during the year include Sage 50 Payroll in the UK,
Sage Ciel Flex in France and Sage 100 i7 in France.
Sage 50 Payroll auto-enrolment connected service
This connected service, which helps SMEs in the UK comply with new
pension legislation, has been a strong driver of growth. It is only available
on subscription and is supported on the latest version of Sage 50 Payroll.
This revenue is incremental because we typically added new services into
customers’ existing premium support plan bundles in the past.
At the end of September 2014, the annualised value of our
auto-enrolment subscription contract base was approximately
£8m. This reflects an attachment rate amongst customers that
needed to comply with auto-enrolment in 2014 of over 60%. We
are well placed to continue supporting businesses that will need
to comply with auto-enrolment legislation going forward.
Software subscription is growing well, in line with our
plans for measured adoption
We are pursuing more active relationships with our customers through
subscription. Our progressive approach is based on demonstrating the
benefits and flexibility subscription offers them, rather than by mandatorily
moving them to subscription pricing. The resulting commitment to offering
customers choice around how they can buy a software licence reflects
the importance we place on customer satisfaction and retention. The
emphasis is therefore on Sage to present customers with differentiated
propositions that persuade them to make the transition to subscription.
Sage Ciel Flex
Sage Ciel accounting and payroll products are aimed at start-up and
small business (“SSB”) customers in France. The success of the tiered
subscription offer called Flex shows that SSB customers are willing to
move to a recurring subscription relationship if they see a product offers
added value. At the end of September 2014, the annualised value
of our Sage Ciel Flex subscription contract base was approximately
£9m, an increase from £5m in the prior year. Over 60% of customers on
subscription have chosen to subscribe to Sage Ciel Ultraflex, which is the
highest tier available and includes premium features and cloud capability.
The growth in the annualised value of the software subscriber base of
29% to £220m, together with subscription contract renewal rates in the
region of 90%, is good evidence that our measured approach is effective.
Sage Ciel Flex demonstrates well the reactivation of off-plan customers.
Approximately 50% of revenue from new Flex contracts secured in the
financial year were with customers who were previously not on a recurring
support plan.
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Sage 100 i7
Sage 100 i7 is aimed at small to medium sized customers (“SMB”)
in France. It is a premium subscription product and has now been
a driver of upgrade activity in the French installed base for several
consecutive reporting periods. It offers a major user interface upgrade,
can be accessed through a web browser and incorporates business
intelligence and spreadsheet integration capabilities. We also launched
Sage 100 i7 Payroll during the year, which has driven upgrade activity
in the second half.
At the end of September 2014, the annualised value of our Sage 100 i7
ERP and payroll subscription contract base was over £16m. The vast
majority of the subscriber base is made up of migrating existing
customers who have a support contract, where the strategy is to
drive higher average selling price on subscription. This reflects the
premium positioning of the product. Sage 100 i7 is either available
on a subscription-only contract or a lower-priced subscription contract
together with an up-front fee. These fees are helping us to smooth the
impact our subscription transition is having on our SSRS revenue base.
Momentum building in the cloud, with 86,000 Sage One
paying subscriptions globally
Sage One is well established in the market as our global software-as-a-
service (“SaaS”) solution for smaller businesses, with a ca.150% increase
in paying subscriptions to 86,000 (2013: 35,000). We continue to push
ahead with our global roll-out for Sage One, which is available in 10
countries, so that we are well placed to drive growth in markets as
cloud adoption accelerates.
We continue to make good progress with Sage One in the UKI, where
the number of paying subscriptions more than doubled to 47,000 from
over 21,000 in the last 12 months. This represents a strong increase in
average run-rate to over 2,100 per month, up from around 1,300 per
month last year, and reflects acceleration to 2,300 per month in the
second half of the year.
We also have strong traction with Sage One in South Africa, where
the number of paying subscriptions increased from 8,700 to over
21,000 in the last 12 months. Adoption in Continental Europe remains
low, reflecting nascent uptake of cloud solutions amongst SSB customers
more generally in that market. In North America, the number of paying
subscriptions remains behind plan, but we continue to build a product
portfolio to provide an attractive cloud platform for small businesses.
We see accountants as a key channel for driving Sage One growth,
with the introduction of Sage One Accountant Edition in North America
an important development in 2014. Driving accountants’ engagement
and the introduction of Sage One Extra in the US and Canada are key
priorities for 2015.
As part of the Group’s continued investment in the cloud, our SaaS
entry-level products in France, Germany and South Africa were
redesigned and incorporated into the Sage One portfolio during the
year. This involved rebranding and aligning the user interface and
product workflows to create global consistency. Excluding the newly
incorporated products, year-end Sage One paying subscriptions were
52,600 (2013: 22,400).
Sage’s hybrid cloud solutions for SMB customers are gaining traction,
with the number of paying subscriptions doubling during the year to
1,500. The launch of Sage ERP X3 version 7 in the summer means
we also offer the mid-market a solution with mobility and web access
at its core. We expect to see further good progress in adoption for these
solutions in 2015.
Disciplined approach to resource and capital allocation
62% of total research and development (“R&D”) expenditure (2013: 52%)
and 57% of total sales and marketing (“S&M”) expenditure (2013: 52%)
is now directed towards the Invest portfolio. This has resulted in an overall
increase in absolute spend during the year across Invest products of
17%, alongside an incremental improvement in organic operating profit
margin to 27.5%. The disciplined approach to resource allocation
supports the 28% organic operating profit margin target in 2015,
which we are on track to deliver.
We are also disciplined in our approach to acquisitions, focusing on
opportunities that support growth in our core business and meet our
returns criteria. During the year we announced two in-fill acquisitions,
which strengthen our payroll capability in the US and Germany, and
acquired the remaining 25% of Folhamatic in Brazil. We also performed
an impairment review and recorded a £44m non-cash charge relating
to our Brazilian operations. This reflects the deterioration in the financial
and economic environment in Brazil. Notwithstanding this impairment,
we remain confident about our growth prospects in Brazil, as reflected
in the 9% organic revenue growth reported for 2014.
Consistent with our focus on shareholder returns, the Board is proposing
a 7% increase in the total ordinary dividend for the year to 12.12p per
share (2013: 11.32p per share). The ordinary dividend for the year is
covered 1.9x by underlying earnings per share.
The Board
In August 2014, we announced the appointment of Stephen Kelly to the
Board as Chief Executive Officer, effective from 5 November 2014. Earlier
this year, Steve Hare joined the Board as Chief Financial Officer, effective
from 3 January 2014.
We also announced the appointment of two new non-executive directors
to the Board, namely Drummond Hall and Inna Kuznetsova, effective
from 1 January 2014 and 6 March 2014 respectively. In November 2013,
Mark Rolfe and Ian Mason retired from their roles on the Board as
non-executive directors.
Summary and outlook
These results are important in demonstrating we are on track to
achieve our financial targets for 2015. Revenue growth is increasing,
the subscription base is growing and cloud momentum is building.
The Group remains confident of achieving 6% organic revenue growth
in 2015, with the anticipated acceleration in growth weighted to the
second half of the year, and organic operating profit margin of 28%.
“ Looking ahead, I believe that Sage, as a trusted partner
to our customers, can be even more instrumental in
supporting the success of SMEs around the world. I look
forward to building on Sage’s technology leadership,
both in the cloud and on-premise, together with our
outstanding customer support, to the benefit of our
current and future SME customers.”
Stephen Kelly
Chief Executive Officer
The Sage Group plc | Annual Report & Accounts 2014
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Our business model
What we do...
Growing economies rely on successful SME businesses. We’re committed
to helping them achieve this success by being their most trusted supporter.
We’ve been dedicated to the success of SME businesses
for over 30 years through the provision of localised products
and services that help our customers to run their businesses
with confidence.
Our support offering is a key strength and is highly valued
because it gives our customers somewhere to turn if they
have a technical problem, an accounting question or when
they’re affected by legislative changes.
Our commitment to supporting our customers in this way,
where we look to maintain ongoing and active relationships
with them, differentiates us from other software vendors.
It also means we’ve built a strong base of recurring revenue
that underpins 73% of our total revenue, which is derived
from 1.8 million support, subscription and payments
relationships that we have with customers across the world.
Ultimately, we have the resources, vision and resilience to
be there for our customers over the long term as their
businesses grow.
Key inputs to our business model
Talented people
We rely on the
flair, commitment and
collaboration of 12,975
employees around
the world.
Trusted brand
The Sage brand is
synonymous with
supporting SMEs.
By striving to be our
customers’ greatest
supporter, we remain
their trusted partner.
Value created
Shareholder returns
Dividends and
share repurchases
Society
Tax paid in the year
£217m
Decrease of 62%^
£107m
Decrease of 10%~
Market insight
Our focus on the
SME market means
we have developed
a deep understanding
of what is important to
small businesses.
Resource allocation
Our approach to how
we deploy our R&D*
and S&M** resources is
governed by where we
see our best opportunities
for future growth.
Local knowledge
Our skill at localising our
solutions has allowed us
to contend with a range
of different legislative
environments across
the world.
Group organic
operating profit
Representing a
margin of 27.5%
£360m
Increase of 7%
Employees
Wages and salaries
£617m
Decrease of 1%
Resource allocation
Investment in R&D*
and S&M**
£417m
Increase in spend of
17% on Invest products
* Research and development.
** Sales and marketing.
^ The decrease is due to the payment of a special dividend of £199m last year alongside an increased rate of share repurchasing as we
worked towards meeting our net debt to EBITDA target ratio of 1x, which we met in June 2013. The total ordinary dividend per share
has increased by 7% to 12.12p this year.
~ The underlying effective tax rate has fallen this year to 27% as a result of a change in the mix of tax rates that we are exposed to across
the globe. For more information on our tax policies, turn to the Financial and operating review starting on page 44.
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Attract
A
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Our strategy sits at the heart of our
business model and dictates how we
respond to the changes taking place
in the markets we serve.
Read more about our strategy
and how it links to our business
model on pages 24 to 35.
R
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…how we create value
Key activities
– R&D*
Routes to market
– Direct
– S&M**
– Support
– Accountant
partners
– Business partners
and resellers
Group organic
revenue
5% organic growth
£1,306m
73% recurring in nature
Open to read more
about the key elements
of our business model.
The Sage Group plc | Annual Report & Accounts 2014
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…how we create value
Key elements of our business model
Attract
These are some of our unique selling
points and are the reasons why
customers are attracted to Sage.
Trusted brand
amongst SMEs
Strong
accountant and
business partner
ecosystem
Localised
products and
services
Technology
and pricing
choice
First-class
support
Activate
Over the years, we’ve built a strong recurring
revenue base by providing customers with
additional services beyond their core software
product, particularly through our support offering.
Software subscription offers us the opportunity
to have closer relationships with more of our
customers, particularly those who do not maintain
a support contract and own their software product
via a perpetual licence. This will help us to build
on our existing base of over 450,000 software
subscription contracts.
Grow
Technology and the cloud are changing how
software is delivered and how businesses
use their data. The new wave of value-
adding services we are providing will help
us to deepen the relationships we have with
our customers and drive higher growth.
Installed base
Software subscription
and support
Software perpetual licence
Standalone support
Connected services
More users
More products and
services (cross-sell)
Higher value
products and
services (up-sell)
Retain
We aim to keep our customers for life by delivering them the
complete, integrated suite of software, services and support.
This helps us to deliver great experiences that make our
customers want to stay with us as their businesses grow.
Customer for life
Growth drivers
KPIs and other metrics
Our sources of revenue
– Attract more new customers
through key products such
as Sage One, hybrid cloud and
Sage ERP X3
Sage One
paying
subscriptions
86,000
Hybrid cloud
paying
subscriptions
1,500
(Up 146%)
Sage ERP X3 customers
(Up 100%)
4,800
(Up 14%)
– Activate customers through a
Number of contracts
support relationship
– Activate customers through
a software subscription
relationship – particularly
where those customers
don’t have a support contract
– either for their core product,
a connected service or both.
1.8m
Down 3%
Organic annualised value of
the software subscriber base
£220m
Up 29%
Recurring revenue
Organic growth: 7% (2013: 6%)
Recurring revenue comprises:
– Maintenance and support (“M&S”)
– Software subscription
– Non-software subscription
– Payments
Around 73% of Sage’s total revenue is recurring, with
customers paying on a monthly, annual or usage basis in
return for a range of different services.
Our subscription and payments contracts can be
characterised as “pay-to-play”, where customers retain
the right to use a software application or service for as
long as they continue to pay.
Recurring revenue is much less susceptible to economic
cycles because many of these services are either critical
to a business’s ability to continue trading or are seen as
indispensable and value-adding.
Our focus on having more active and productive
relationships with all of our customers, preferably through
subscription but also through support relationships,
means recurring revenue growth is a strong indicator of
whether we’re succeeding in delivering on our strategy.
Software and software-related services
("SSRS")
Organic contraction: 1% (2013: flat)
SSRS revenue comprises:
– Grow licence average selling price
("ASP") through software upgrades
and migrations
– Grow support ASP through
up-selling support customers to
premium support
– Grow share of wallet by expanding
the number of services taken by
each customer
– Grow share of wallet by expanding
the number of paying users for
each product
– Minimise the number of customers
who leave us for another provider
– Minimise the number of customers
cancelling their support contract
– Drive higher net promotor scores
Premium support penetration
– New licence sales
92%
Rate maintained
Number of payments cross-sell
customers
15,800
Up 14%
Recurring contract renewal rate
83%
Up 1%
– Upgrades and migrations
– Professional services
– Other software-related services
SSRS revenue captures perpetual licence sales, where
customers pay an up-front fee for the right to own and
use their software forever. This represents the way
software has been sold traditionally in the industry for
many years.
SSRS revenue is typically more susceptible to economic
cycles. When the economy is buoyant, businesses have
more confidence and so are more willing to invest in their
IT infrastructure.
However, when economic conditions are more
challenging, businesses tend to reduce unnecessary
expenditure and delay big investment decisions.
Our focus on a measured transition to software
subscription will mean that, over time, revenue for our
software products will increasingly shift out of SSRS
and into recurring revenue.
Understanding our customers
Customer demand drivers
The world of an SME is an exciting but rapidly changing place, with each
day bringing new competitive, economic and regulatory challenges.
Sage has been the advocate of SME businesses for over
30 years and we’ve developed an intimate understanding of
their needs over that time. We continue to play an important
role in helping them achieve success through the innovative
products and value-adding services that we provide.
Our global presence and considerable resources mean
our customers trust us to stay the course with them as
they grow and be there for them when they need us most.
Addressing our markets
We address the SME market by dividing it into
three segments:
– Start-up and small businesses (“SSB”)
– Small to medium sized businesses (“SMB”)
– Mid-market businesses
We do this because the characteristics of a small
business differ markedly to those of a larger business.
Recognising these differences and tailoring our products
and services accordingly gives us a competitive advantage
in our markets and is one of the reasons why customers
choose us.
Customer demand drivers
We regularly speak to our customers to understand what matters most to them.
We’ve found there are some key needs that resonate particularly strongly with
SME businesses, which fall into five areas. They want:
– Access to a knowledgeable person for support
– Peace of mind around legislative compliance
– Appealing and intuitive software
– Control to achieve success and grow
– More efficient working
Meeting customer needs
Our product and service offering has evolved in direct response to what our customers
have told us is important to them. This has influenced our approach to support in
particular, which we manage as a value-adding service in its own right, rather than
as basic aftercare.
The demand drivers have also defined our strategy, where we are adapting our
product and service offering in response to trends in our markets, particularly in relation
to cloud technology and subscription.
This section considers each demand driver and explores how support, technology and
subscription are helping us to more effectively meet the challenges posed by each.
Support
See page 18
Technology
See page 20
Subscription
See page 22
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Customer demand drivers
Access to a knowledgeable
person for support
Most entrepreneurs don’t go into business to be
a bookkeeper or an accountant, yet maintaining
good accounting records is important.
As businesses grow the range and variety of
issues they face also grows, with increased
operational complexity, international expansion,
hiring more employees and a greater reporting
burden just some examples of new challenges
they might face.
Many small businesses don’t have the resources
to maintain accounting, payroll and regulatory
expertise in-house. This is why millions of our
customers value being able to turn to us for help
through our support offering.
This is because whilst start-ups are least likely to have any
kind of in-house accounting expertise, they also have the
simplest needs. Once they become accustomed to their
software and the regulations that affect them, they can
often grow comfortable being self-sufficient.
However, larger businesses contend with greater
complexity and reporting burdens, so a higher proportion
of them rely on the support services provided by us and
our business partners.
Peace of mind around
legislative compliance
Our support offering is an effective way for
our customers to remain compliant with new
legislation. In recent years we’ve seen a raft of
changes affecting SME businesses, particularly
around electronic filing and payroll.
Our support offering
Over the years, we’ve been pioneering in delivering proactive
business support to SMEs where our support experts
provide technical, accounting and regulatory advice to
our customers.
Premium support
Our premium support offering represents the highest tier
of support and is where customers gain access to the
most value-adding features, including free selected software
updates, priority call answering and online training materials.
We deliver much of this support directly either online or
over the telephone, where we receive over 30,000 calls
a day, and we even offer on-site support when required.
Our professional services offering that delivers
system installation, maintenance and support services
to customers with more complex or bespoke ERP
requirements is supported by a global network of
around 20,000 business partners.
Our support services are delivered locally, which sets us
apart from our competitors. Our customers value being
able to contact someone who speaks their language,
who is familiar with their local reporting conventions and
who is available during the working day in their time zone.
The need for support
There is a greater propensity for larger businesses to need
support. For example, around a third of start-up and small
businesses have support, whereas the rate for SMBs is
over 60%, and for mid-market customers it is around 75%.
For many customers these services are highly valuable
because they are often the only available resources they
have to help them identify, understand and comply with
new legislation that affects them.
We are also highly proactive in preparing our customers
for new legislation by running awareness campaigns and
working with government to not only understand what is
changing, but to use our understanding of the SME market
to shape those changes.
Always up to date with subscription
Paying for software on a subscription basis is also an
effective way to remain compliant. As a subscription
customer is essentially purchasing a service from us, they
are entitled to all future software upgrades as soon as
they become available.
Customers therefore don’t need to worry about whether their
software has the necessary features to allow them to comply
with new standards or conventions, which means they
can concentrate on running their businesses.
The Sage Group plc | Annual Report & Accounts 2014
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Understanding our customers continued
Customer demand drivers continued
Appealing and intuitive software
The cloud and technology are redefining the
expectations people have of the software they use.
Touch-based user interfaces, “big data” analytics,
more powerful mobile devices, mobile applications
and greater integration between services are just
some examples of how technology is helping our
industry meet customer needs.
Software-as-a-service (“SaaS”)
SaaS is a great example of where the cloud is delivering
real change for start-up and small businesses. For example,
many entrepreneurs have traditionally used spreadsheet
software as their first accounting solution largely because
they usually already have access to it.
Accounting software has also tended to address the
needs of the bookkeeper rather than the owner-manager
in the past, making accounting seem complicated to
those who need to maintain business records but aren’t
financial experts.
SaaS is changing this by providing owner-managers
with straightforward, easy-to-access accounting solutions
that make bookkeeping much less onerous.
SaaS is delivered through an internet browser and is
designed to be much more intuitive, elegant and simple
so that non-financial users can pick it up quickly.
The rise of SaaS has created new market opportunities
across the world, particularly in our markets in North
America and the UK where new technology adoption
is most pervasive.
Our SaaS solution for start-up and small businesses is
Sage One – to read more about Sage One, turn to page 31.
Engaging user experiences
Advances in software design and the user experience
aren’t confined to new SaaS solutions. The success of
touch-based smartphones and tablets has given rise to
a change in how users expect to interact with the
software they use.
Customers want software to be modern, engaging and
visually appealing, which makes it more intuitive and
learnable for the average user.
We’re responding by modernising the user interface design
of some of our most successful products.
Examples of where customers are already seeing these
improvements include the UK version of Sage 50 and
Sage ERP X3 version 7, which employs a completely new,
web-first user interface.
Tailored mobile applications
Modern user interfaces are also helping to make
business software accessible to a greater range of users.
Financial users have been the primary target audience
for business software traditionally, but business data
has significant utility outside the finance office.
For example, field-based salespeople and engineers can
be much more efficient if they’re able to access data and
manage their work flows in real time.
When this information is presented in a way that is intuitive
to them, rather than a financial user, it is easier for them
to engage with it to improve their productivity.
We’re using the latest cloud technologies to liberate
customer data so that it can be accessed by a range of
new mobile applications, including mobile billing, sales
and payments. This is helping to broaden the appeal and
relevance of business information to more users.
Control to achieve success
and grow
SaaS and mobility offer businesses an
unprecedented level of control because they
provide access to data anytime, anywhere.
However, there are a range of use cases for
this technology that vary across the segments
we serve.
Mobility use cases
In the case of start-ups and small businesses, it is likely the
highly-mobile owner-manager is both the bookkeeper and
the decision maker, so being able to record new transactions
and view key business information whilst travelling is
extremely valuable.
In the case of a more established business, decision makers
find value in having mobile access to business intelligence,
but core accounting and invoice processing will almost
certainly be managed by office-based finance teams.
We believe making these distinctions is important so that
we are clear on where and how we will add the most value.
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Data security, maintenance and customisation
More established businesses need to weigh the benefits
of moving data and business infrastructure to the cloud
against the operational risks of doing so.
Businesses are often concerned about who owns their
data and where it is stored when they move it to the
cloud because they need to consider the privacy,
business interruption and disaster recovery implications.
They may also have concerns around exercising less
control over when software updates and maintenance
are carried out, which can be an issue if they occur during
critical reporting periods and something goes wrong.
Customisation is important to larger businesses,
particularly in the mid-market. However, depending on
the technology involved, there may be limits to how much
a pure cloud solution can be tailored to the specific needs
of a particular business.
On-premise software remains popular because it continues
to provide businesses with comfort and flexibility around
these issues. However, we don’t want these businesses to
have to curtail their cloud vision and we’ve been innovative
in addressing this challenge.
Our cloud ERP products offer our SMB and mid-market
customers the best of both worlds; they can place their
data and business infrastructure in the cloud but continue
to have a level of control that is more consistent with an
on-premise environment.
Lower-risk investment decisions through
subscription
Investing in IT infrastructure is often expensive. High
up-front costs make new ventures risky because, if they
fail, businesses are left with equipment and software they
don’t need.
Subscription lets businesses achieve their growth plans in a
controlled way without taking on this additional risk. Capital
decisions become operating decisions because subscription
payments are made on a monthly or annual basis, whereas
a perpetual licence purchase requires a higher, up-front fee.
Businesses can therefore put the necessary systems in place
quickly, for moderate additional cost and in a way that can
be scaled back with limited financial impact if the new
venture isn’t successful.
More efficient working
Subscription pricing and a change in the way
software is being delivered to customers is
providing businesses with greater flexibility.
Pay for what you use
The industry is moving away from delivering software as
one large application in favour of several smaller applications,
with each one offering a discrete piece of functionality.
When coupled with subscription, this lets businesses pay
for only the software they need, rather than requiring them
to buy everything an application can do even if they don’t
use all of it.
We’re doing this through our connected services offering,
which includes integrated payments, CRM, business
intelligence and mobility.
We’ve also developed technology that looks to give all
of our customers access to these benefits even if they
don’t want to move all of their infrastructure to the cloud.
Many established businesses have invested heavily in their
existing system and would prefer not to start over.
Greater efficiency through collaboration
Technology is helping users to work more collaboratively with
each other, their accountants and their business partners.
We’ve seen some of the strongest evidence of the benefits
of collaboration with our accountant partners and their small
business clients.
Accountants are looking for ways to reduce their costs
and add more value. They want to be able to offer a more
rounded and consultative service, as well as saving time and
reducing cost by transferring client data and documentation
in the cloud.
As more businesses move towards housing some or all
of their data online, either because they use a cloud product
or because they have a connected on-premise solution,
accountants will be able to do much more for their
customers in real time, work more efficiently and expand
their addressable market beyond their local area.
The Sage Group plc | Annual Report & Accounts 2014
17
Meeting customer needs
Support
Providing customers
with first-class support
Meeting the people who are incredibly passionate about supporting
SME businesses.
Linked customer
demand drivers:
– Access to a
knowledgeable
person
for support
Sage customer support, UKI
Jim McGlen, Head of Customer Services for
Start-Up and Small Business in the UKI, instils in
his team that good customer service is about
getting the basics right. “It’s being polite. It’s
listening. It’s using your resources and expertise,
and being truly passionate about our customers,”
he explains. “At Sage we are focused on giving our
customers a breath-taking experience – one that
exceeds all expectations. We strive to deliver the
kind of service that people will talk about in the
days to come with their friends and colleagues.”
Our customer service employees undergo a
rigorous training process that equips them with the
knowledge they need in order to guide and support
businesses in the right way. Lucy Hogg, customer
support advisor for Sage One, has first-hand
experience of this, “Teams are coached in every
aspect of the job. When I joined Sage One I spent
an intense five week period learning both the theory
and the practice side of the role. A coach would sit
with me and listen to my practice calls, reviewing
what went well and what needed to be worked on.”
Lucy believes this training, combined with our
commitment to helping customers run their
businesses, sets us apart from other software
companies. “When Real-Time Information, which
was a new piece of legislation, was brought
out there was a big initiative to help educate our
customers in the changes that would affect their
business. It is refreshing to work for a company that
doesn’t just sell products but wants to be there for
our customers, effectively acting as a helping hand
to them.”
We are constantly changing and evolving the way
that Sage delivers customer service based on
what our customers are telling us, and our people
are actively engaged in requesting feedback. For
example, we introduced a 24/7 Sage One support
line after recognising that customers do not always
have the opportunity to contact us during normal
working hours.
Lucy adds, “I’ve worked at some companies
that are very inward facing – always focused
on what they need to do to hit targets. At Sage
the emphasis is definitely on ‘what do we
need to do to help our customers more’.
It is always about the customer and that is
something that makes me incredibly proud
to work here.”
1.5m
support contracts
3,000+
technical experts
globally
30,000+
calls per day
Turn to pages 26 to 28 to read about how we’re looking to build active
relationships with customers who don’t have a support contract.
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The Sage Group plc | Annual Report & Accounts 2014
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Meeting customer needs continued
Technology
Purposefully innovating
with technology
Small businesses can share, store and collaborate using Sage One and Google
Apps for Business.
Jason Savage Photography, USA, using Sage One
As a self-taught photographer, Jason Savage
understands the need to travel light. Over the past
few years he has turned his hobby into a successful
business venture that takes him all over the world,
making the ability to work and respond on the
move vital.
Based in Montana, USA, Jason became a
Sage customer in 2013 after finding other products
aimed at businesses of his size too complex
and not able to offer the mobility he needed.
“Having round the clock access to my finances
whilst I’m out on a shoot is extremely valuable to
me”, Jason explains. “I travel frequently and am
sometimes on the road for long stretches, so being
able to keep up with my accounts and my clients
at the same time makes my job a lot easier.”
Jason uses Sage One in conjunction with Google
Apps, which means he can access the documents
that are essential to his business quickly and easily
whilst collaborating and liaising with clients and
suppliers in real time.
“Being mobile is paramount and working in
this way gives me the freedom to manage
my cash flow and send invoices from
wherever I am, whether it’s on a laptop
or my smartphone.”
Jason pays for Sage One on subscription, which
is something that suits the requirements of his
business well. “Paying in this way is great for me,”
he says. “It’s less worrisome as there is no
up-front expense.”
As a business owner Jason cites reliability, support
and ease of use as the most important factors
when choosing business software. “I chose Sage
One because of its clean, simplistic layout and
usability as well as its mobile features. The fact that
my data is also automatically backed up to Google
Drive from Sage One gives me extra reassurance
and peace of mind.
“We have recently relocated and knowing that I
have the support of helpful, informed people at the
end of the phone if I ever need them is encouraging
to me as a business owner.”
Linked customer
demand drivers:
– Appealing and
intuitive software
– Control to
achieve success
and grow
– More efficient
working
86,000
Sage One paying subscriptions
globally at 30 September 2014
Turn to Capturing the technology opportunity on pages 29 to 32 to read more
about how we’ve responded to the varying needs of the customers in our segments.
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The Sage Group plc | Annual Report & Accounts 2014
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www.jasonsavagephotography.com
Meeting customer needs continued
Subscription
Greater flexibility
through subscription
Subscription provides our customers with control and visibility over their cash flow.
Locamont 2M, France, using Sage Ciel Ultraflex
As a family run business, it is important to owner
Patricia Baldy that she is contactable not only in
the office but from home on an evening, during
weekends and over holiday periods. She explains,
“We run a haulage company so it is not unusual for
customers to call very late in the day to book a last
minute job. I need to be on hand to speak to them,
fill out the required paperwork and pass their details
on to the staff that will be on the ground moving
them, sometimes the next day.”
Locamont 2M currently employs a team of five
people based out of their office in Vitrolles, South
of France. Patricia has used Ciel products for a
number of years after being introduced to using
the software as part of her accountancy training.
Initially attracted by the product’s simplicity and
ease of use, she has recently taken the decision
to pay by subscription as part of the Ultraflex
package, adding, “I like the fact that I know
how much we are spending on our software
month-on-month and can budget accordingly.”
Linked customer
demand drivers:
– Peace of mind
around legislative
compliance
– Control to
achieve success
and grow
– More efficient
working
When discussing Sage Ciel Flex’s cloud features,
which are only available on subscription, Patricia
is quick to allay any fears around security by saying,
“In the past I wasn’t that disciplined in backing up
my data regularly – I didn’t have the time. Since
moving some of our software to the cloud I have
no concerns about the safety of our documents.
I also like the fact I can go to my accountant with
just a laptop and make any changes that I need
to there and then without having to carry hard
copies of everything.”
The company is also utilising some of the mobile
apps that are offered as part of the subscription.
Patricia continues, “I use the apps that help us
to plan – being able to forward plan is critical to
the future of our business and I find being able to
access them through my phone very useful.”
£9m
Annualised value of Sage Ciel Flex subscription
contract base at 30 September 2014
60%
Sage Ciel Flex customers have chosen Ultraflex,
the highest tier available
Turn to pages 26 to 28 to read about why subscription is such an important part of our strategy.
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The Sage Group plc | Annual Report & Accounts 2014
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www.locamont2m.com
Our strategy
On track to meet our financial targets
Our strategy is helping us to respond to the changes taking place in the
markets we serve in a way that leverages the strengths of our business model.
Our strategy is the driving force behind our commitment to doubling
our long-term historic average organic revenue growth rate from 3% to
6% by the end of our 2015 financial year. We are also committed to delivering
an increase in organic operating profit margin of 100bps to 28% over the
same period.
e b e n e f its of subscription
h
T
g t h e t echnology opportu
nity
C a p t u ri n
c u s i n g our business
o
F
Rigorous
resource
and capital
allocation
Description
The benefits of subscription
We’re focused on transitioning our business
model away from selling software on a
perpetual licence and towards providing
a holistic range of products and services
to our customers on subscription.
Capturing the technology opportunity
Technology and the cloud are offering us
the chance to bring a new range of value
propositions to our customers, which holds
the key to a number of commercial benefits
that can help us to drive higher growth.
Focusing our business
Through greater focus on our best
opportunities for success, working together
across the world in a more collaborative
way and by setting priorities globally, we
can better exploit our strengths.
Rigorous resource and capital allocation
With our consistent, strong cash flows,
we retain considerable financial flexibility.
Our main strategic priority remains an
acceleration of growth, both organically
and through targeted acquisitions, and
we are investing in support of that aim.
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Performance
Associated KPIs
Associated risks
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Software subscription is the primary driver of organic
revenue growth this year. We now have over 450,000
software subscription contracts that have an annualised
value of £220m. Sage Ciel Flex and Sage 100 i7 in
France, and Sage 50 Payroll in the UK, have all delivered
good subscription growth this year and are some of the
best examples of our subscription drivers in action.
We’ve continued to deliver on our technology roadmap this
year. Sage One is now live in 10 countries, our cloud ERP
solutions for SMB business are all commercially available
and Sage ERP X3 version 7 is now live with an online offering
announced. We’ve also started to release modernised
versions of some of our other leading on-premise products
so that we can deliver a cloud-enriched experience to many
more of our customers.
– Organic annualised value of
the software subscriber base
– Unsuccessful transformation
of business
– Risks associated with
change management
– Inadequate processes
and systems
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– Adoption of Sage One
– Loss of data
– Adoption of hybrid cloud
– Unavailability of online solutions
– Sage ERP X3 organic
– Loss of source code and
revenue growth
intellectual property
– Integration of payments
– Issues with traditional products
We have continued to reallocate investment towards
our best opportunities for future growth and increased
profitability, which has driven a 17% increase in R&D and
S&M expenditure on products categorised as "Invest".
– Research and
– Inability to attract skills
development reallocation
and resources
– Sales and marketing reallocation
– Poor resource allocation
– Inadequate processes
and systems
This year we have increased the total ordinary dividend by
7% to 12.12p. We have returned £91m to shareholders
through share repurchases as part of maintaining our
1x net debt to EBITDA target ratio. We also made
two material acquisitions in Germany and the US
for a combined consideration of around £110m*.
– Net debt to EBITDA ratio
– Poor resource allocation
– Interest cover
– Inadequate processes
and systems
* Based on prevailing exchange rates at the time of announcement.
Turn to pages 36 and 37
for our strategic KPIs.
Turn to pages 42 and 43 for
a list of our principal risks and
mitigations.
The Sage Group plc | Annual Report & Accounts 2014
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Our strategy continued
The benefits of subscription
Subscription is changing the nature of software purchasing, with customers
electing to pay an ongoing fee in return for a service, rather than just a product.
A fundamental change for Sage
Software subscription represents a fundamental change
for Sage because we’ve historically sold our products
predominantly through perpetual licensing, where customers
pay once up-front and own their software forever.
We’re currently driving a measured transition to subscription.
This builds on our strong existing recurring revenue base,
which is underpinned by our maintenance and support
offering and represents 73% of total revenue.
Software subscription driving growth
We have over 450,000 software subscription relationships,
which means we already have an established subscription
base in our business.
However, the emphasis on subscription is increasing as cloud
technology and greater customer acceptance are driving
acceleration in the rate of adoption. For example, this year
we’ve seen a 29% increase in the organic annualised value
of the software subscriber base to £220m.
Subscription and usage-based services such as payments,
which we refer to as "pay-to-play", now represent 26% of
our total revenue and were the biggest contributor to organic
revenue growth this year.
Subscription and our business model
Subscription is an important strategic priority, particularly
as it offers us a range of ways to accelerate growth.
More active relationships through subscription
A key principle of our business model is that we want to
have active and ongoing relationships with our customers.
Active relationships are important because they help us to
better support our customers and grow the range of services
they take from us because we are better able to anticipate
their needs.
Historically, we’ve focused on doing this through our
support and payments offerings, which has helped us
to build over one million support-only relationships and
over 200,000 payments relationships.
We are focused on both the transition of this existing
contract base to software subscription, and also on
establishing active relationships with customers who don’t
have a support or payments contract by encouraging them
to move to subscription for their core software product.
Dual model approach
Even though we are focused on transitioning customers
to subscription, retaining their business and ensuring
they’re satisfied is always of paramount importance.
This is why we’re driving a measured transition where
perpetual licensing remains available alongside subscription,
which preserves our customers’ ability to choose and
gives them the flexibility to move when they’re ready.
The financial impact on Sage
There have been a number of market communications in
recent years from other software vendors where they expect
to suffer a short-term dip in revenue as they transition their
business to subscription. This is the result of subscription
revenue being recognisable over time, whereas perpetual
licence revenue is typically recognised up-front.
We are well-placed to mitigate the likelihood and extent
of such a dip. In particular, we are in a position of strength
with 73% of revenue already recurring in nature, the majority
of which would not be displaced by subscription. The
continuing availability of perpetual licensing also creates
a portfolio effect so that the impact of any revenue
displacement is gradual.
Subscription growth drivers
There are also a number of other important subscription
drivers available to us, several of which help us to generate
incrementally new revenue.
These drivers include attracting new types of customer
to Sage who are looking to pay on subscription, reactivating
existing customers who are not on another type of recurring
contract with us, and increasing subscription adoption
amongst existing customers more generally through
up-selling and cross-selling a broader range of subscription-
based products and services.
Split of revenue by type
26%
Pay-to-play
revenue
Organic annualised
value of software
subscriber base
(£m)
220
+29%
170
SSRS
Maintenance and support
Software subscription
Payments
Non-software subscription
27%
47%
16%
8%
2%
2013
2014
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Subscription growth drivers
Building on over 450,000(cid:98)existing software
subscription contracts
Attract
New types of customer
Activate
Reactivation of off-plan customers
Grow
Retain
Cross-selling and greater lifetime value
Greater customer loyalty
Attract
New types of customer
Subscription is making it easier for new types of businesses
to become Sage customers because the up-front cost barrier
to ownership is lowered.
For example, many start-ups have historically run their business
on spreadsheets until they grew big enough to justify the cost of
a software package. However, SaaS technology and subscription
pricing have combined to create a new market for simple and
cost-effective accounting software.
We’re addressing this important new opportunity with Sage One,
our global SaaS solution, which attracted 51,000 new paying
subscriptions this year.
Activate
Reactivating off-plan customers
There are millions of businesses who use our software,
and many also maintain some form of ongoing contract with
us for additional services such as payments or support.
Subscription offers us the chance to engage with customers
who don’t have one of these contracts, which we refer to as
“off-plan” customers.
These customers require a catalyst to move onto a recurring
software subscription contract with us, and our cloud technology
initiatives are providing compelling reasons to move.
Most importantly, we’re able to drive subscription adoption across
the majority of our customer base because we’re committed to
bringing cloud-based connected services to all of our customers,
even where they choose to keep their core system on-premise.
Activating off-plan customers through subscription is a significant
growth opportunity because it is immediately revenue-enhancing
and does not displace any existing revenue streams.
Grow
Cross-selling
We’re able to maintain a much more intimate relationship with
a subscription customer, which means we can anticipate and
be more attentive to their needs.
This can help to increase our effectiveness at cross-selling other
relevant products and services because we can be more targeted
in our approach.
Our connected services strategy is providing us with the platform
to drive this cross-sell and increase our share of wallet.
Greater lifetime value
Subscription customers pay on an ongoing basis for as long as
they require the use of their software and are entitled to receive
all future upgrades to their product. The value of a subscription
relationship is therefore greater than that of a perpetual licence
over its lifetime.
This makes subscription a much higher-value revenue stream
over the long term that gives us greater visibility and certainty
over our future revenue potential.
Lifetime value growth is the primary opportunity we have with
our existing on-plan customers, particularly as they are already
active and are paying to take additional services from us.
Technology-driven added-value features and intelligently priced
product and service bundles are providing these customers
with reasons to swap their support contract for a software
subscription relationship.
Retain
Greater customer loyalty
Perpetual licence customers typically buy software in multi-year
cycles. In the intervening years we may not have frequent
contact with these customers, unless they also have a support
relationship with us, so making them aware of upgrades or
other relevant products and services is more difficult.
Subscription changes the dynamics of the relationship because
there is no multi-year buying cycle, customers are entitled to
all upgrades as soon as they are available, and we’re able to
work much more closely with them to ensure they’re satisfied.
This reduces the likelihood a customer might be tempted
to switch because their needs are being met.
Software subscription has very high rates of renewal as a result
– we see renewal rates of around 90% by volume. This compares
to renewal rates on support contracts of around 80%. Retaining
our customers is incredibly important because we want them to
be satisfied so that we preserve the long-term revenue potential
contained within our installed base.
Turn to pages 12 and 13 to read
more about our business model.
The Sage Group plc | Annual Report & Accounts 2014
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Our strategy continued
The benefits of subscription continued
Progress this year
Whilst subscription is fuelling growth across a range of different products in a number of countries,
there are three stand-out performers this year that are good examples of the subscription drivers in action:
– Sage Ciel Flex in France
– Sage 100 i7 in France
– Sage 50 Payroll in the UK
Sage Ciel Flex
Our subscription contract base for Sage Ciel Flex, an accounting and payroll product aimed at
SSB businesses in France, was approximately £9m at the end of September 2014. Over 60%
of customers have chosen to subscribe to Sage Ciel Ultraflex, which is the highest tier of the
Sage Ciel Flex offering and includes premium features, cloud functionality and mobility.
Whilst Sage Ciel Flex has been successful in driving growth in new customer acquisition and
existing customer migrations, it is also a great example of off-plan customer reactivation. For example,
approximately 50% of revenue from contracts secured this year was derived from customers who were
previously not on a recurring support plan.
These customers are typically sensitive to price, so they need compelling reasons to move away from
what they already have. However, our focus on providing value-adding features that increase efficiency
and ensure customers are legislatively compliant is encouraging many of them to move to subscription.
Sage 100 i7
Sage 100 i7 is aimed at SMB businesses in France, is only available on subscription and has now been
a driver of upgrade activity in the French installed base for several consecutive reporting periods. It offers
a major user interface upgrade, can be accessed through a web browser and incorporates business
intelligence and spreadsheet integration capabilities.
We also launched Sage 100 i7 Payroll during the year, which has helped to sustain upgrade activity into
the second half. At the end of September 2014, the annualised value of our Sage 100 i7 ERP and payroll
subscription contract base was over £16m. This represents penetration of around 30% of the entire Sage
100 customer base, which is an increase from 14% at the end of last year.
Sage 100 i7 is either available on a subscription-only contract or a lower-priced subscription contract
together with an up-front fee, with the majority of customers choosing the latter option. These fees are
helping us to smooth the impact our subscription transition is having on our SSRS revenue base.
Sage 50 Payroll
New legislation requiring all employees to be enrolled in a company pension scheme is affecting many
SME businesses in the UK. Our new auto-enrolment pension module, a connected service that integrates
with Sage 50 Payroll, is helping our customers to comply with the new requirements.
The auto-enrolment module is only available on subscription and is supported on the latest version of
Sage 50 Payroll. However, as part of our measured transition, Sage 50 Payroll customers can retain their
existing perpetual licence for the core product so they don’t have to move to subscription completely if
they’re not yet ready.
At the end of September 2014, the annualised vaue of our auto-enrolment subscription contract base
was approximately £8m. This represents a penetration rate of over 60% amongst customers who were
required to comply this year.
Turn to pages 36 and
37(cid:98)to view our strategic
KPI progress.
KPIs used to
measure progress
in this cornerstone:
– Organic annualised
value of the software(cid:98)
subscriber base
Turn to page(cid:98)22(cid:98)
to hear from a Sage
Ciel Flex customer.
Turn to the fold-out
on page(cid:98)13(cid:98)to read
about the difference
between SSRS and
recurring revenue.
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Capturing the technology opportunity
Sage has a passion for technology innovation that is purposefully applied.
The right technology for our customers, powered by the cloud
We’re providing relevant cloud solutions to both new and existing customers across our segments.
We know that moving straight to the cloud is a great option for some businesses. For others, they need to weigh moving
to the cloud against other things that are important, including preserving existing infrastructure, maintaining control of
systems and data, obtaining peace of mind around security and retaining the ability to customise.
Core system
Or
On-premise
Cloud
Connected services
Mobile applications
Third-party applications
We want to deliver the power of the cloud to all our customers, regardless
of how they deploy their core system.
Our technology vision
Choice of deployment
We want businesses to be able to choose how they deploy
their core system – either in the cloud or on-premise – so
that they can make a progressive transition without having
to compromise or face significant disruption.
Data liberation
We want businesses to have anytime, anywhere access
to their data regardless of their deployment choice, whether
that is in the cloud or on-premise.
More users and greater collaboration
Through data liberation we want a broader range of users
to be engaged with business information that is available
to them in real time, which will empower them to be
more effective.
Data and process intelligence
We want to make business data work harder by driving
deeper insight, and through intelligent business process
automation. We believe customers should spend more time
on running their business and less time on data manipulation
and processing.
Amazing cross-device experiences
People are no longer confined to a desktop computer
when they work. We want them to be able to roam
seamlessly between different devices and achieve the same
things on a smartphone or tablet as they would on their PC.
Choice of deployment through flexible
architecture
We’re providing flexibility so that customers can transition
to the cloud in a way that is comfortable for them and that
recognises their needs will change over time.
Our deployment choices fall into three categories:
– Software-as-a-service ("SaaS") cloud
– Connected on-premise
– Cloud ERP
We’ve considered the technological merits of these
deployment choices in the context of the needs of
SME businesses to deliver a range of targeted solutions.
The Sage Group plc | Annual Report & Accounts 2014
29
Our strategy continued
Capturing the technology opportunity continued
SaaS cloud
SaaS solutions are delivered through an internet browser, are
available on subscription and are easy to use and maintain.
Start-ups, in particular, typically want to go straight to a SaaS
cloud solution because they have no existing infrastructure,
have relatively straightforward needs and want to get
started quickly.
Our global SaaS solution designed for start-up and small
businesses is Sage One.
Sage One also simplifies bookkeeping, accounting and
payroll, which makes it much more accessible to owner-
managers who often aren’t accountants and don’t have
financial expertise.
Connected on-premise
Many established businesses have existing on-premise
systems that work well and on which their employees
are trained. They want to move to the cloud in a way that
doesn’t require them to dispose of what they already have
or that leads to significant disruption.
On-premise software also continues to offer the greatest level
of control and functional richness, and customers don’t want
to give up some of those features so they can benefit from
the cloud.
We’re delivering the best of both worlds to our customers
by modernising our existing on-premise products and
liberating the data that is contained within our customers’
systems. We’re using this data to enrich the desktop
experience with connected services, cloud collaboration
and mobile applications.
We’ve already started rolling out some of these capabilities
in the UK with Sage 50, in Spain with Sage Contaplus and
in North America with the Sage Data Cloud.
Cloud ERP
For our SMB and mid-market customers who are ready
to migrate to the cloud, we’ve developed a range of cloud
ERP solutions that allow them to make the transition easily
and with the minimum of disruption.
Cloud ERP solutions can offer our customers the option
of outsourcing their IT infrastructure, which can save them
money and means they no longer have to think about
maintaining and replacing their own equipment.
As businesses grow, their system scales easily and they
only need to pay for the extra capacity they need.
These solutions also preserve some of the benefits of
on-premise software, particularly around control over data,
customisation and compatibility with third-party applications.
The power of connected services
Connected services allow us to separate features and
functionality from the core system and deliver them as
smaller applications. This heralds a move away from annual
release cycles and core applications that have perhaps
become big and bloated over time as they have evolved.
Customers purchase these services as additional bolt-ons
to their core product, which provides them with greater
flexibility and is more cost-effective because they don’t have
to pay for features they don’t use. This invariably involves
establishing a subscription relationship with us, and you
can read more about subscription on pages 26 to 28.
Most importantly, our technology architecture gives all our
customers the chance to benefit from connected services,
whether they’re running their business in the cloud or
on-premise.
We’re able to add significant value through tight integration of
these connected services into the core system because we
make the whole suite.
Our key connected services
Mobility
Our mobile applications are bringing tailored user interface experiences to
a wider range of users. For example, field-based salespeople and engineers
are benefiting from our mobile sales, billing and payments applications
because they can be more productive whilst they’re on the road.
We’ve also launched smartphone companion applications for our small
business solutions including Sage One, so owner-managers can create
and edit business data even whilst they’re away from the office.
CRM
Our CRM solutions provide new ways to interact with customers,
particularly by taking advantage of social media and the latest mobile solutions.
We are focused on providing CRM solutions that are integrated with our
ERP products because this helps our customers benefit from increased
efficiency and productivity by gaining a single, customer-centric view across
their business.
Integrated payments
Our integrated payments solutions seamlessly record receipted payments
information into our customers’ core system, saving them time and
reducing the risk of error. Our Sage Exchange technology in North
America also provides customers with a holistic overview of their entire
payments ecosystem from all sources, whether they be online or card
machine transactions.
Business intelligence
Our business intelligence solutions are improving business decision making.
They’re helping our customers overcome data complexity so that they have
better insight into what is happening in their business.
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Our cloud solutions
Sage One
Sage One currently comes in five versions: Cashbook,
Accounts, Payroll, Accountant Edition and Accounts Extra.
Commercial opportunities for Sage
The technology changes we’re delivering give us a range
of opportunities to drive higher growth across the four key
elements of our business model:
Cashbook and Accounts are designed to meet the basic
needs of start-ups, where the owner-manager is often
also the bookkeeper. Payroll simplifies the management
of a payroll of up to 15 employees. Accountant Edition
allows accountants to access and edit their clients’ data
in the cloud.
We launched Accounts Extra in the UK in October 2013.
It is suitable for slightly larger businesses with a small finance
team because it handles multiple user accounts, and
supports international trading and multi-company accounting.
The launch of Extra was an important milestone in
broadening the appeal of Sage One to more established
businesses, where price points and user numbers are higher.
Hybrid cloud for SMBs
We’ve completed the launch of cloud versions of our key
ERP products across our major markets for SMB customers:
– Sage 200 Online in the UKI
– Sage Murano Online in Spain
– Sage 300 Online in North America
– Sage 100 Online in France
– Sage Office Online in Germany
These products give SMBs a clear migration path to the
cloud, whilst retaining a user experience that is familiar
and consistent and doesn’t require them to compromise
significantly on customisation and control.
Sage ERP X3
Sage ERP X3 is our global solution for the mid-market. It is
available in over 100 countries, is supported by 290 business
partners and serves the needs of 4,800 customers and
228,000 users.
Sage ERP X3 version 7, which we released earlier this year,
is a major upgrade and a significant technology evolution.
Version 7 is designed with mobility and web native solutions
at its core and sets the foundation for the next generation
of ERP.
We also announced the planned launch of Sage ERP X3
Online this year, which preserves the customisation benefits
that are important to mid-market customers whilst letting
them move their core system to the cloud.
Attract
Technology is creating new markets for us to
serve, particularly amongst start-ups where SaaS
technology is encouraging more of them to move
away from spreadsheets and begin using
accounting software.
Utilising new technology in our products is incredibly
important if we are to attract new customers to Sage
and live up to their expectations. This means that
constant and purposeful innovation must lie at the
heart of what we do.
Activate
When we sell cloud solutions to our customers
we’re creating a closer and more active relationship
with them because these products are always sold
on a subscription basis.
Technology therefore represents an important
delivery system for subscription.
The cloud and our growing range of connected
services are acting as catalysts, where customers
are willing to move to a subscription relationship with
us because of the real added-value they provide.
You can read more about the benefits of subscription
for our customers starting on page 14, and for Sage
starting on page 26.
Grow
Connected services are helping us to increase
our share of wallet (i.e. the average revenue per
customer), because customers are more likely to
take several services from us if they can do so in
a flexible way by only paying for what they use.
We’re also increasing our share of wallet by bringing
these services to a broader range of non-financial
users by focusing on tailoring the user experience
to their specific needs.
Retain
Customers are more likely to stay with us if we’re
meeting their needs and they are satisfied with
what we do for them. Our research tells us that
when several services are able to work together
seamlessly, customer satisfaction increases. This
is why we’re focusing on the tight integration of
connected services with our core products.
86,000
Sage One paying
subscriptions at
30 September 2014
1,500
Hybrid cloud paying
subscriptions at
30 September 2014
7%
Sage ERP X3 organic
revenue growth in
the year ended
30 September 2014
Turn to pages 12 and
13 to read more about
our business model.
The Sage Group plc | Annual Report & Accounts 2014
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Our strategy continued
Capturing the technology opportunity continued
Turn to pages(cid:98)36
and 37(cid:98)to view our
strategic KPI progress.
KPIs used to
measure progress
in this cornerstone:
– Adoption of
Sage One
– Adoption of
hybrid cloud
– Sage ERP X3 organic(cid:98)
revenue growth
– Integration
of payments
Progress this year
Sage One
Sage One is now commercially available in 10 countries, including recent releases in Canada, Portugal,
Switzerland and South Africa. This year we launched the new Sage One Accounts Extra edition in the
UK and released Sage One Accountant Edition in the US.
Several existing products have also been brought into the Sage One family, including: PastelMyBusiness
Online, PastelMyPayroll Online and VIP Payroll Online in South Africa; E-paie in France; and Einfachlohn
in Germany.
The number of paying subscriptions increased almost 150% in 12 months to 86,000, up from 35,000* at
the end of September 2013. In the UKI, where Sage One is currently most established, we were adding
paying subscriptions at an average rate of 2,300 a month in the second half of the year.
The increase in subscriptions was led by a strong performance in the UKI. The uptake of Sage One in
Continental Europe is nascent, which is consistent with the level of adoption of SaaS accounting in the
wider market. We are seeing promising early traction with Sage One in Canada following this year’s
release, but the level of progress in the US is slow and remains below our expectations.
Hybrid cloud for SMBs
The roll-out of our hybrid cloud solutions for SMBs, which are building on our existing flagship SMB
products in our major markets, is now complete with the commercial launch of Sage 100 Online in France
and Sage 300 Online in the US.
Whilst SME adoption of our hybrid cloud products is emerging, the number of paying subscriptions
has doubled in the year to 1,500, with Sage Murano in Spain performing particularly well.
Sage ERP X3
Sage ERP X3 version 7 was launched in May 2014 to positive reviews. We also announced Sage ERP X3
Online, which is a pure cloud solution for our mid-market customers that is due for commercial launch
in 2015.
Sage ERP X3 organic revenue grew 7% in the year, which is below our stated ambition to deliver double-
digit organic revenue growth. However, Sage ERP X3 continues to perform well outside of France, where
it delivered organic revenue growth of 20%.
Connected on-premise
Sage 50 2015 launched in the UK in August 2014 with a completely re-designed user interface. Alongside
Sage Contaplus in Spain, it has also been significantly modernised so that we can deliver a cloud-enriched
experience to our on-premise customers. Sage Drive, which will let customers share data and collaborate
in the cloud, went live in October 2014 in Spain and in December 2014 in the UK.
Connected services
Sage 50 Payroll in the UK saw a 400% increase in subscription revenue following the release of
a connected service that helps affected customers deal with new auto-enrolment pension legislation.
We have also launched a range of new smartphone apps, including a companion app for Sage One
that lets customers raise invoices on their smartphone.
The number of integrated payments customers also increased 14% to 15,800 during the year, although
the performance in North America, in particular, was below our expectations.
*
Following the incorporation of several existing SaaS products into the Sage One portfolio during the year, prior year Sage One paying
subscriptions have been restated on a like-for-like basis. Without the restatement, Sage One paying subscriptions at 30 September 2014
were 52,600 (2013: 22,400).
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Focusing our business
Working with greater focus has led to a change in how we allocate resources
and in the way we collaborate with each other across the globe.
Split of total R&D and S&M
spend by I:H:S category
Change in % spend
on Invest products*
62
57
52
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Invest
Harvest
Sunset
59%
37%
4%
2013
2014
2013
2014
Research and
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Sales and
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acquisitions, disposals and products held
for sale. Reported 2013 Invest percentages
were: R&D – 50%; S&M – 49%.
Global Brand Campaign 2014
In January we launched our first global brand campaign across billboards,
print, radio and digital media. The campaign focused on how Sage can
put customers in control of their business so they can look forward with
confidence. The campaign has been a key milestone in delivering our strategy
and connecting the market with a single brand. We measured prospective
customers’ awareness of Sage and have seen an increase in global brand
awareness and familiarity with our product offerings.
Focusing our business captures a number of initiatives
that we’ve undertaken:
– Changing the way we work
– Streamlining our product portfolio and reallocating
investment to our best growth opportunities
– Transforming our brand
Changing the way we work
Although we’re executing on our strategic priorities
locally, we have defined them globally. We believe it is
the only way to create the right conditions for success:
– It ensures all of our people are pursuing the same
goals in a consistent way
– It means we make products that can be deployed
globally whilst maintaining our focus on meeting
the local needs of our customers
– It encourages closer working practices and
knowledge sharing across the organisation
Streamlining our portfolio and
reallocating investment
We categorise our core products as Invest, Harvest
and Sunset based on their potential to create value,
whether that is through higher revenue growth or
profitability. We use this categorisation to determine
our investment priorities.
Invest products represent our best current and future
growth opportunities and receive more research
and development (“R&D”) and sales and marketing
(“S&M”) investment.
Harvest products are mature and deliver higher margins,
and we continue to invest in them appropriately to
maintain their market positions.
Sunset products have lower growth potential and, in
most cases, the needs they serve are better met by
another product within our portfolio. These high margin
products are undergoing a sunset process where
associated investment is being redirected towards
our Invest product portfolio.
This rigorous framework for managing the portfolio
gives us clearer focus on the strategic drivers that will
influence growth in both the near and medium term.
The Sage Group plc | Annual Report & Accounts 2014
33
Our strategy continued
Focusing our business continued
Progress this year
Investment reallocation
The reallocation of R&D and S&M spend to our best opportunities has continued during the year alongside
an overall organic increase in expenditure in these areas of almost 4%.
62% of total R&D spend (2013: 52%) and 57% (2013: 52%) of total S&M spend is now directed towards
products categorised as Invest opportunities. This has resulted in an overall increase in absolute R&D and
S&M spend on Invest products of 17%.
Spend on the other categories has fallen as a result, with 35% and 3% of R&D spend, and 39% and 4%
of S&M spend, being directed to Harvest and Sunset products respectively (2013: R&D – 41% and 7%;
S&M – 43% and 5%).
Turn to pages(cid:98)36
and 37 to view our
strategic KPI progress.
KPIs used to
measure progress
in this cornerstone:
– R&D reallocation
– S&M reallocation
Transforming our brand
Much of Sage’s growth over the last 30 years has been through acquisition as our business has expanded
and strengthened its presence across a number of global markets.
However, this resulted in a highly-fragmented brand identity, where customers could relate to local product
names but sometimes had never heard of Sage.
A single brand
Our brand teams are changing this to strengthen Sage’s global presence and to make better use of
our differentiated market position as the strongest supporter of SME businesses. One of the biggest
initiatives we’ve undertaken to help us do this was our first global brand campaign that was launched
in January 2014.
The campaign incorporated an array of radio, digital, print and billboard advertising across Europe, North
America, South Africa and Australia that raised our profile, and there are plans in place to follow up with
a second campaign in due course.
Sage Summit 2014
In North America, our annual Sage Summit convention, which was held in Las Vegas this year, was the
biggest ever with over 5,000 customers and partners in attendance. The focus of the event was to be the
centre of a North America-wide conversation about the success of SMEs, the challenges they face and
how Sage can help them to grow and thrive.
Attendees were able to hear from successful business people including: Biz Stone, the co-founder of
Twitter; Magic Johnson, the former LA Lakers basketball player and now highly-successful businessman;
and Jessica Alba, the famous Hollywood actress who has started her own business.
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Rigorous resource and capital allocation
With our consistent, strong cash flows(cid:98)we have the(cid:98)financial strength to
support growth.
Our main strategic priority remains an acceleration of growth, both organically and
through targeted acquisitions, and we will invest in support of that aim. This will enable
us to support growth of the ordinary dividend, with any surplus capital being returned
to shareholders from time to time.
Investment
and R&D
Targeted
acquisitions
Through-cycle
gearing
Rigorous
resource
and capital
allocation
Selected
disposals
Capital returns
Sustainable
and progressive
dividends
Returns to
shareholders
Investment and R&D
Our approach to investing in our products and services
is explained in the Focusing our business section on
pages 33 and 34.
199
251
122
91
126
2013
2014
Ordinary dividends
Share repurchases
Special dividends
Ordinary dividend policy
Our policy is to grow the ordinary dividend progressively, and
this year the full year dividend grew 7% to 12.12p per share.
Maintaining the leverage target
We target a net debt leverage level of around 1x our EBITDA,
with flexibility to move higher if acquisition opportunities
present themselves. In maintaining our core leverage, we
adopt a holistic approach to capital management that
includes growing the ordinary dividend and, where
appropriate, returning surplus capital to shareholders.
Capital returns
Share repurchase decisions are made against strict price,
volume and returns criteria that are agreed by the Board and
regularly reviewed. Share repurchasing gives us the flexibility
to manage the leverage target when there is an absence of
appropriate acquisition opportunities.
Where the absence of such opportunities leads to a
significant net debt leverage target shortfall we may also
consider larger returns of capital to shareholders as we did
in June 2013, where we paid a £199m special dividend.
Our acquisition strategy
Our approach to acquisitions is disciplined and we typically
require opportunities to:
– Demonstrate earnings accretion in year one
– Deliver a return in excess of our risk-adjusted cost
of capital in the medium term
We are focused on acquisition opportunities that fall into
three broad areas:
– Technology bolt-ons that offer us opportunities to
cross-sell into our installed base
– Businesses in existing geographies that strengthen the
core offering
– Businesses in new geographies where we are prepared
to wait longer to achieve target returns in exchange for
access to higher-growth markets
Acquisitions this year
This year we announced two material acquisitions:
Exact Software Deutschland GmbH ("Exact Lohn")
Exact Lohn is a German payroll business previously owned
by Exact Holding N.V. This acquisition is transformative for
Sage’s payroll business in Germany.
PAI Group, Inc. ("PayChoice")
PayChoice is a provider of payroll and HR services for
SMBs in the US. The acquisition accelerates Sage’s move
to the cloud in this market by leveraging PayChoice’s SaaS
platform for self-service and outsourced payroll.
For more information on these and other acquisition-related
developments, turn to note 15 in the Financial statements
starting on page 150.
Turn to pages 36 and 37 to view
our strategic KPI progress.
KPIs used to measure progress
in this cornerstone:
– Net debt to EBITDA ratio
– Interest cover
The Sage Group plc | Annual Report & Accounts 2014
35
Key performance indicators
Measuring our progress
The measurement of progress in delivering our strategy is
important and we track a range of KPIs to measure performance.
Strategic KPIs
The benefits
of subscription
Capturing the
technology opportunity
Organic annualised
value of the software
subscriber base
£220m
2013: £170m
Description
Adoption of Sage One
Adoption of hybrid cloud
Sage ERP X3 organic
revenue growth
86,000
2013: 35,000
1,500
2013: 750
7%
2013: 12%
The amount of organic software
subscription revenue recorded
in the last month of the year
multiplied by 12.
The number of paying
subscriptions at the end of
the year for our portfolio of
Sage One products.
The number of paying
The percentage increase in
subscriptions at the end of the
year for hybrid cloud products.
organic revenue derived from
Sage ERP X3 in the year
compared to the prior year.
Software subscription is defined as
any contract where customers may
no longer use their software
product if they cease to pay. The
prior year KPI has been restated
to include mandatory maintenance
and support arrangements where
customers may no longer use
their software product if they cease
to pay. Payments contracts and
non-software subscription
contracts are excluded from
this measure.
Performance
Software subscription was
the primary driver of organic
revenue growth this year, which
is reflected in the 29% increase
in this KPI. We saw strong
subscription traction in France
and the UKI, in particular,
where legislative and technology
catalysts encouraged
customers to move to a
subscription relationship.
Following the incorporation of
several existing SaaS products
into the Sage One portfolio
during the year, prior year Sage
One paying subscriptions have
been restated on a like-for-like
basis. Without the restatement,
Sage One paying subscriptions
at 30 September 2014 were
52,600 (2013: 22,400).
Sage One paying subscriptions
have increased by almost 150%
in 12 months. The UKI continues
to be the primary driver of this
growth. Adoption in Continental
Europe is nascent, reflecting the
rate of SaaS adoption more widely
in that market. Whilst we are
seeing promising early adoption
in Canada following Sage One’s
release there this year, our
progress in the US remains slow
and is below our expectations.
SMB adoption of hybrid cloud
is emerging, but we have seen
good progress across our major
markets this year and have
doubled the number of paying
subscriptions in 12 months.
We saw the greatest traction
in Spain, where paying
subscriptions increased to
almost 450.
Organic growth of 7% is below
our stated ambition for Sage
ERP X3 of double-digit organic
revenue growth. However,
Sage ERP X3 continues to
perform well outside of France,
where revenue has grown by
20%. This year, we launched
Sage ERP X3 version 7, and
we also announced the planned
launch of Sage ERP X3 Online.
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Focusing
our business
Rigorous resource
and capital allocation
Integration of payments
R&D* and S&M**
spend by category
Net debt to
EBITDA ratio
Interest cover
R&D reallocation
S&M reallocation
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2013: 13,800
The number of customers at
the end of the year who are
using a Sage core accounting
system, a Sage payments
solution, and the integration
of the two is provided or
owned by Sage.
62:35:03 57:39:04
2013: 52:41:07
2013: 52:43:05
1.1:1
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17x
2013: 24x
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Resource optimisation is captured by
reporting on the resource allocation in
our business.
R&D and S&M spend in the year is
divided into three categories of product –
Invest:Harvest:Sunset.
Our strategy is to focus our investment
towards the Invest products in our portfolio.
This KPI is on an organic basis. Previously
reported allocations for 2013 were:
R&D – 50:43:07; S&M – 49:46:05.
The net value of cash less
borrowings expressed as a
multiple of rolling 12-month
EBITDA. EBITDA is defined
as earnings before interest,
tax, depreciation, amortisation
of acquired intangible assets,
acquisition-related items,
fair value adjustments
and non-recurring items
that management judge to
be one-off or non-operational.
Statutory operating profit
for the year excluding
non-recurring items that
management judge to be
one-off or non-operational,
expressed as a multiple
of finance costs excluding
imputed interest for the
same period.
The number of integrated
payments customers
increased 14% this year,
although our performance
in North America, in particular,
was below our expectations.
We continue to focus on reallocation of
R&D and S&M investment towards our best
opportunities for higher growth and profitability.
This year, overall expenditure across these
categories has increased by 4% organically,
with a 17% increase on products classified
as Invest.
During the year we
returned £217m of cash
to shareholders through
ordinary dividends and
share repurchases, and
paid out £65m in respect of
acquisitions and the purchase
of the remaining 25% of
Folhamatic in Brazil. Net
debt stood at £437m at
30 September 2014.
The fall in interest cover is due
to the annualisation of interest
relating to the 2013 US private
placement, which was only in
issue for approximately four
months of last year. In
addition, we have maintained
a higher level of net debt on
average throughout this year,
which has increased our
interest costs.
* Research and development
** Sales and marketing
The Sage Group plc | Annual Report & Accounts 2014
37
Key performance indicators continued
We monitor our financial performance against a number of different
benchmarks. These are set in agreement with the Board and used
to evaluate progress against our strategy.
Financial KPIs
Organic revenue growth
Underlying operating profit margin
Underlying cash conversion
5%
27.5%
107%
5%
4%
4%
27.4%
27.3%
27.3%
27.5%
25.5%
117%
111%
112%
107%
106%
2%
Flat
2010
2011
2011
2012
2013
2014
2010
2011
2012
2013
2014
2010
2011
2012
2013
2014
Description
Organic revenue neutralises the impact
of foreign exchange in prior year figures
and excludes the contribution of current
and prior year acquisitions, disposals and
products held for sale.
For a reconciliation of organic revenue
to statutory revenue, turn to page 45.
Underlying cash conversion is calculated
as cash flows from operating activities,
adjusted for cash acquisition-related
items and non-recurring cash items of
£2m (2013: £2m), divided by underlying
operating profit.
Going forward, underlying cash
conversion will be calculated as
above but also after operating capital
expenditure. Current year underlying
cash conversion is 99% on this basis.
Underlying operating profit excludes:
– Recurring items including amortisation
of acquired intangible assets, acquisition-
related items, and fair value adjustments
– Non-recurring items that management
judge to be one-off or non-operational
The impact of foreign exchange is neutralised
in prior year figures.
Elsewhere in the Annual Report & Accounts we
refer to organic operating profit and margin, as
this measure better reflects like-for-like business
performance year-on-year. Underlying margin
is included here for consistency with previous
reports and to provide a five year comparator.
Organic operating profit is underlying operating
profit further adjusted to exclude the contribution
of current and prior year acquisitions, disposals
and products held for sale.
For a reconciliation of underlying margin to
organic margin, turn to page 45.
Performance
5% organic revenue growth represents an
important milestone in demonstrating that we
are on track to achieve our organic revenue
growth target in 2015 of 6%. The increase
in growth this year was primarily due to an
acceleration in the rate of recurring revenue
growth to 7%, up from 6% last year. This was
driven by good progress with our software
subscription initiatives.
Underlying profit margin of 27.5% reflects a
Underlying cash conversion has decreased
reduction in overheads that previously supported
non-core products that we disposed of last year,
alongside improved profitability as a result of the
increase in organic revenue, and disciplined cost
management. We remain committed to delivering
a 28% margin in 2015 in line with our stated
financial targets.
by 5% this year as a result of foreign
exchange movements and an increase
in working capital.
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Recurring contract renewal rate
Customer KPI
8%
16%
14%
12%
8%
83%
81%
81%
81%
82%
83%
2010
2011
2013
2014
2012
-2%
2010
2011
2012
2013
2014
The number of contracts successfully renewed in the year as a percentage
of those that were due for renewal.
Underlying basic EPS is defined as underlying
profit after tax divided by the weighted average
number of ordinary shares in issue during the
year, excluding those held as treasury shares.
Underlying profit after tax is defined as profit
attributable to owners of the parent excluding:
– Recurring items including amortisation
of acquired intangible assets, acquisition-
related items, fair value adjustments and
imputed interest
– Non-recurring items that management judge
to be one-off or non-operational
All of these adjustments are net of tax. The
impact of foreign exchange is neutralised in
prior year figures.
For a reconciliation of underlying basic EPS
to statutory basic EPS, turn to page 46.
Underlying EPS growth primarily reflects a
decrease in the weighted average share base
due to the repurchase of shares during the year,
and a reduction in the effective rate of tax.
This offsets higher finance costs resulting from
our move to a 1x net debt to EBITDA ratio and a
decrease in underlying operating profit following
the sale of non-core products last year.
Our recurring contract renewal rate has been consistently high at over
80% for a number of years, which is testament to the value customers place
on support.
Software subscription relationships have higher rates of renewal compared to
support of around 90%. Our subscription success this year has driven a shift
in the mix towards these higher quality relationships, which has led to an
increase in the overall renewal rate of 1%.
The Sage Group plc | Annual Report & Accounts 2014
39
Principal risks and uncertainties
Balancing risks and rewards
Through our risk management processes, we manage risks as we execute on our
strategic and business plans.
Our risks
Risks can materialise and impact on both the achievement of business strategy and the successful running of our business. A key element
in achieving our strategy and maintaining services to customers is the management of these risks. Our risk management strategy is therefore
to support the successful running of the business by identifying and managing risks to an acceptable level and delivering assurances on this.
How we identify risk
Our risk identification processes seek to identify risks from both a top down strategic perspective and a bottom up local operating
company perspective.
Audit Committee
Group Board
Group Risk and
Assurance Director
Executive Committee
Regional management
Country CEOs
The Board
The Board has overall responsibility for risk management, the setting
of risk appetite and the implementation of the risk management policy.
The Board reviews the output from the Group Risk Report with specific
focus on the top three risks.
The Audit Committee
The Audit Committee reviews and challenges the Group Risk Report,
which is then submitted to the Board. It reviews all risks at each meeting
and ensures adequate assurance is obtained over the risks that are
identified. The Audit Committee is also responsible for the independent
review and challenge of the adequacy and effectiveness of the risk
management approach.
Executive Committee
The Executive Committee is responsible for the identification, reporting
and ongoing management of risks and for the stewardship of the
risk management approach. The Executive Committee identifies and
assesses the key strategic risks to the Group on an annual basis. The
outputs of the assessment are sent to the country CEOs for inclusion in
their local risk assessment exercises. In addition, the Group Risk Report is
reviewed and agreed by the Executive Committee prior to submission to
the Audit Committee and Board.
Country CEOs
Country CEOs are responsible for the identification, reporting and
ongoing management of risks in their respective countries. Country
CEOs facilitate local risk assessment exercises to review the key strategic
risks and to identify top local risks within their country. The outputs of
these assessment exercises are sent to regional management and
the Group Risk and Assurance Director for review and challenge.
Regional management
Regional management are responsible for the reporting, challenge and
ongoing management of risks in their respective regions. Regional
management, with support from the Group Risk and Assurance Director,
review and challenge the risk information from the countries and agree
the regional response to the key strategic risks and the top regional risks.
Group Risk and Assurance Director
The Group Risk and Assurance Director is responsible for the facilitation
and implementation of the risk management approach throughout Sage.
The Group Risk and Assurance Director consolidates the regional risk
reports and creates a Group Risk Report containing the responses to the
key strategic risks and the top local risks for Sage as a whole. The Group
Risk Report is sent to the Executive Committee for review prior to
submission to the Audit Committee and Board.
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How we manage risk
Our risk management process has been built to identify,
evaluate, analyse and mitigate significant risks to the
achievement of our business objectives.
Our risk appetite
We use risk appetite (as shown below) to ensure the appropriate focus
is placed on the correct risks. Identified risks are scored on a gross
and a net risk basis using our predefined scoring matrix. Risks are then
prioritised for mitigation based on both of these scores and using our risk
appetite. The top risks, currently three, are reviewed by the Board on an
annual basis, with prioritised risks below the top three being reviewed by
the Audit Committee.
Mitig a t e
Id
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Risk management
process
A
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alu ate
v
E
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L
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Probable
Likely
Possible
Unlikely
This year we have aligned our risk reporting with our risk
management process in order to give a more holistic view
of our risk landscape.
Identify the principal risk
Evaluate the level of risk
Analyse the potential impact
Mitigate to lower risk exposure
Minor
Moderate
Major
Critical
Impact
Ultimate risk and is unacceptable. Risk treatment is required as soon as possible.
Significant risk and is unacceptable. Risk treatment is required within
reasonable timeframes.
Moderate risk and is acceptable. However, risk treatment may be considered in
the longer term.
Limited risk and is acceptable. No further action is required.
Turn over the page to
see our principal risks and
associated mitigations.
The Sage Group plc | Annual Report & Accounts 2014
41
Principal risks and uncertainties continued
Identify
Strategic risks
Business change
We do not successfully
change our business,
especially in relation to
technology initiatives, business
model, ecosystem and
organisational design to
support the change
Change management
With new business priorities
and changes in senior
personnel, there is a risk
associated with the change
management impact
on people, processes
and systems
Financial risks
Processes and systems
Our processes and systems
are not fit for purpose and/or
do not provide data in a
consistent or appropriate
format. This risk is especially
relevant as we seek to change
the business (see business
change risk)
Compliance risks
Regulatory and
compliance failure
We suffer a significant
compliance or
regulatory failure
Source code and
intellectual property
We do not appropriately
protect our source code
and intellectual property
Evaluate
Analyse
Mitigate
– We do not keep up with market
– Strategic opportunities are regularly
expectations and competitor activities
– Negative impact on future revenue and
damage to future growth potential
– Loss of existing customers and inability
to attract new customers
– Negative reputational impact
– We are slow to identify and respond
to change
reviewed by the Group Board
– Change and strategic projects are identified
and their delivery monitored by the Executive
Committee and Group Project Management
Office ("PMO")
– Technology Advisory Group review of key
technology initiatives on a regular basis
– Product development needs identified
via customer input and external research
– Detailed subscription and pricing initiatives
planned and being delivered
– Loss of talent and resources key
– Change management programme,
to strategic delivery
– Inability to operate effectively and
maintain a competitive edge
– Loss of sensitive information
and knowledge
including talent reviews, system requirements
reviews and programme management
– Key man dependency and succession
planning processes
– Inaccurate reporting of financial
and non-financial information,
leading to damage to reputation
– Business decisions made on the
basis of inaccurate information
– Reduced understanding of
existing customers
– Negative impact on the speed
and the ability to compare and/or
consolidate information
– Increased data risk exposure
– Financial reporting review and external
audit procedures
– Financial data verification
– Internal audit process reviews, with areas
for improvement identified and remediation
plans put in place
– System reviews and transformation projects
– Negative reputational impact
– Data breach, corruption or loss leading
to potential regulatory penalties or
financial loss
– Impact on current and future revenues
and damage to future growth potential
– Loss of existing customers and inability
to attract new customers
– Unauthorised copies of our software
are made, leading to loss of revenue
and/or customers
– Negative reputational impact
– Impact on current and future revenues
and damage to future growth potential
– Group-wide compliance programme which
seeks to ensure that all local, national and
international regulatory and compliance
requirements are identified and complied
with
– Key examples of compliance requirements
include data protection, PCI compliance and
the Bribery Act
– Local registration of trademarks
– Use of third parties and security tools and
techniques to securely store and protect
source code and intellectual property
– Access controls and monitoring systems
to police unauthorised use of products
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Identify
Evaluate
Analyse
Mitigate
– Negative reputational impact
– Data breach, corruption or loss, leading to
potential regulatory penalties or financial loss
– Framework in place, but being further
developed and enhanced to control the
risks associated with the protection of data
– Negative impact on current and future
– Ongoing monitoring of security incidents
revenue and damage to growth potential
– Loss of existing customers and inability to
attract new customers
– Negative reputational impact
– Negative impact on current and future
revenue and damage to growth potential
– Loss of existing customers and inability
to attract new customers
– Potential to create key person dependencies
– Capacity issues and inability to focus
sufficient management attention
where required
– Inability to execute strategy and achieve
business deliverables
– Detailed product and services release and
quality control procedures
– Thorough quality assurance processes
and initiatives relating to the level of service
provided to customers
– Detailed framework to control the risks
associated with the provision of online services
– Ongoing monitoring of availability of
online solutions
– Talent management, skills attraction
and recruitment processes in place
– Resource allocation processes in place
– Budgeted financial performance and
– Detailed business planning and budget
KPI targets are not achieved
– Strategic initiatives are not completed
and our potential is not realised
processes to review allocation of resource
and financial results on a regular basis
– We do not keep up with market
– Global brand campaign targeting customer
expectations and competitor activity
– Negative impact on current and future
revenue and damage to growth potential
– Loss of existing customers and inability
to attract new customers
– Inability to attract new talent
– Negative reputational impact
– Negative reputational impact
– Negative impact on current and
future revenue and damage to future
growth potential
– Loss of existing customers and inability
to attract new customers
and prospects
– Consistency of brand messaging
– Detailed product and services release and
quality control procedures
– Thorough quality assurance processes
and initiatives relating to the level of service
provided to customers
Operational risks
Loss of data
Accidental or malicious
loss of data (being either
our customers’ data or our
own data). This includes
the risk of cyber attack
Online solutions
The availability of live online
solutions does not meet
customer expectations
or requirements
Skills and resources
We do not have or
cannot attract and retain
the required skills and
resources for strategic
and business delivery
Resource allocation
We do not appropriately
allocate resources to
key priorities
Brand
Inadequate brand
awareness amongst
customers and prospects
Traditional products
We suffer a major
issue with a significant,
traditional, on-premise
product (bugs, meeting
customer expectations
or upgrade experiences)
Key
Increase in risk
Decrease in risk
No change in risk
The Sage Group plc | Annual Report & Accounts 2014
43
Financial and operating review
Momentum with revenue growth, subscription growth and cloud adoption.
Group performance
The Group delivered organic revenue growth of 5%
(2013: 4%), and increased organic operating profit
margin to 27.5% (2013: 27.1%).
The strong momentum around subscription adoption
reported in the first half of the year remains the primary
driver of the increased organic growth rate for the full year.
This was supported by continued progress in up-selling
maintenance and support to existing customers, offset by
weaker performances in the mid-market in France and in
North American payments.
Organic operating profit growth reflects a reduction in
overheads that previously supported the non-core products
disposed of in March and April 2013, alongside improved
operating leverage resulting from organic growth and
disciplined cost management.
Organic figures neutralise the impact of foreign currency
fluctuations and exclude the contribution from acquisitions,
disposals and products held for sale to aid comparability.
A reconciliation of organic operating profit to the underlying
operating profit reported in 2013 is shown on page 45.
Statutory performance has been impacted by material
movements in key exchange rates during the year,
particularly in Europe, North America, South Africa and
Brazil. Statutory figures also include the contribution of
acquisitions and disposals. The current year statutory
operating profit includes a £44m goodwill impairment
relating to our Brazilian operations. The prior year statutory
operating profit included a £186m non-recurring item relating
to the disposal of non-core products.
Recurring revenue
The Group has delivered an improvement in organic recurring
revenue growth to 7% (2013: 6%), which is evidence of
strengthening momentum in subscription adoption across
the Group. This has resulted in an improved contract renewal
rate of 83% (2013: 82%). The improvement in growth was
achieved despite a slowdown in the performance of North
American payments, which was impacted by market-wide
pricing pressure.
Recurring revenue represents 73% of the Group’s total
revenue, representing a change in mix of 2%. This highlights
the success of our subscription initiatives this year in
particular, and continues a long-running strategic shift to
higher quality and less cyclical revenue that is underpinned
by our maintenance and support contract base.
SSRS revenue
Organic SSRS revenue contracted by 1% in the year
(2013: flat). Weak new licence and professional services
revenue in France has weighed on SSRS performance in
the European mid-market. The Group also faced strong
comparators as a result of legislative change in certain
markets, particularly in the UKI.
These factors were offset by an improved SSRS
performance in Spain, which is no longer contracting,
and a strong performance from Sage ERP X3 in
North America and South Africa.
Revenue
Statutory revenue contracted by 5% to £1,307m
(2013: £1,376m). The decline mainly reflects the inclusion
of £57m of revenue from disposals in the prior year, and
adverse foreign exchange movements. These factors offset
organic revenue growth in the core business.
The average exchange rates used to translate the
Consolidated income statement for the year are set
out on page 47.
Operating profit
Statutory operating profit increased to £298m (2013: £181m)
and includes a £44m goodwill impairment charge relating to
our Brazilian operations. Statutory operating profit in the prior
year included a non-recurring loss on the disposal of
non-core products of £186m.
Organic operating profit margin in the prior year excludes the
contribution from non-core products disposed in March and
April 2013. A reconciliation of the previously reported 2013
underlying margin of 27.3% to the 2013 organic margin of
27.1% is shown on page 45.
Organic operating profit increased by 7% to £360m
(2013: £337m), and organic operating profit margin
increased to 27.5% (2013: 27.1%). The increase is primarily
due to a reduction in overheads that previously supported
the non-core products. Operating profit margin has also
benefited from an improvement in operating leverage as
a result of revenue growth, and from a disciplined approach
to managing the cost base.
Research and development pexpenditure
Total R&D expenditure was £131m, which represents 10%
of total organic revenue. During the year, R&D expenditure
on Invest products increased 25% organically as resources
have been reallocated from Sunset and Harvest products.
All R&D expenditure incurred this year was expensed.
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Revenue
Europe
Americas
AAMEA
Group
Operating profit
Europe
Americas
AAMEA
Group
Margin
Revenue mix
2014
£750m
£412m
£144m
£1,307m
2014
£206m
£53m
£39m
£298m
22.8%
Statutory
2013
£777m
£448m
£151m
£1,376m
Statutory
2013
£156m
(£14m)
£39m
£181m
13.1%
Change
-3%
-8%
-4%
-5%
Change
+33%
n/a
+1%
+65%
2014
£750m
£412m
£144m
£1,306m
2014
£215m
£106m
£39m
£360m
27.5%
Organic
2013
£724m
£393m
£129m
£1,246m
Organic
2013
£204m
£98m
£35m
£337m
27.1%
Recurring revenue
SSRS revenue
Organic
Europe
Americas
AAMEA
Group
% of total organic revenue
2014
£536m
£335m
£81m
£951m
73%
Organic to statutory reconciliations
Organic
Non-organic adjustments1
Underlying
Impact of foreign exchange
Underlying (as reported)
Recurring items2
Non-recurring items3
Statutory
Revenue
£1,306m
£1m
£1,307m
–
£1,307m
–
–
£1,307m
2013
£501m
£317m
£71m
£889m
71%
2014
Operating
profit
£360m
–
£360m
–
£360m
(£16m)
(£46m)
£298m
Change
+7%
+6%
+14%
+7%
Margin
27.5%
27.5%
27.5%
22.8%
2014
£215m
£77m
£63m
£355m
27%
Revenue
£1,246m
£57m
£1,303m
£73m
£1,376m
–
–
£1,376m
2013
£224m
£76m
£58m
£357m
29%
2013
Operating
profit
£337m
£18m
£355m
£21m
£376m
(£5m)
(£190m)
£181m
1 Non-organic adjustments comprise contributions from acquisitions, disposals and products held for sale.
2 Recurring items comprise amortisation of acquired intangible assets, acquisition-related items and fair value adjustments.
3 Non-recurring items comprise items that management judge to be one-off or non-operational.
Change
+4%
+5%
+12%
+5%
Change
+6%
+8%
+11%
+7%
Change
-4%
+2%
+10%
-1%
Margin
27.1%
27.2%
27.3%
13.1%
The Sage Group plc | Annual Report & Accounts 2014
45
Financial and operating review continued
Earnings per share
Underlying basic earnings per share increased by 8%
to 22.69p (2013: 20.98p) due to a lower effective tax rate
and a reduction in the average number of shares in issue to
1,094.4m (2013: 1,168.8m). The reduction was due to share
repurchases and inclusion of the full impact of the share
consolidation effected in June 2013 into the average share
base. These factors were partly offset by an increase in net
interest cost.
Basic earnings per share (“EPS”) reconciliation
Underlying basic EPS
Impact of foreign exchange
Underlying basic EPS (as reported)
Recurring items
Non-recurring items
Statutory basic EPS
2014
pence
22.69
–
22.69
(1.44)
(4.18)
17.07
2013
pence
20.98
1.29
22.27
(17.59)
(0.71)
3.97
Statutory basic earnings per share increased to 17.07p
(2013: 3.97p), which reflects the factors set out above,
the inclusion of the non-recurring loss on disposal of
non-core products in the prior year and the £44m
impairment charge recorded this year.
Net finance cost
Net finance costs increased to £21m (2013: £16m). This was
principally due to the annualisation of interest on gross debt
following the raising of US$400m of US private placement
(“USPP”) loan notes in May 2013. The average interest rate
on borrowings during the year was broadly in line with the
prior year at 3.75% (2013: 3.78%).
Taxation
The statutory income tax expense was £90m (2013: £117m).
The effective tax rate on statutory profit before tax was 32%
(2013: 71%). The effective tax rate on underlying profit before
tax was 27% (2013: 28%). This is in excess of the standard
rate of UK tax due to the higher tax rates applicable in
the other jurisdictions in which we operate. The prior year
expense includes a non-recurring tax charge of £17m on
the disposal of the non-core products.
The income tax charge and the total tax paid in the year are
underpinned by Sage’s tax policy, which is aligned with the
overall goals of the business including Sage’s vision, strategy,
code of ethics and guiding principles.
We seek to manage our tax affairs in a responsible and
transparent manner, to comply with relevant legislation
and with due regard to our reputation. Our approach is in
line with the principles issued by the Confederation of British
Industry (“CBI”) in May 2013. Sage’s tax policy has been
agreed by the Board, with progress being monitored by the
Group Audit Committee. The policy has been shared with
the UK tax authorities.
Cash flow and net debt
Cash flow
Underlying operating profit
Non-recurring cash items
Depreciation/amortisation/profit
on disposal
Share-based payments
Working capital movements
Exchange rate and other movements
Statutory cash flow from
operating activities
Net interest
Tax paid
Net capital expenditure
Free cash flow
2014
2013
£360m £376m
(£2m)
(£2m)
£28m £30m
£3m
£11m
(£1m)
£8m
(£1m)
(£11m)
£382m £417m
(£19m)
(£11m)
(£107m) (£119m)
(£27m)
(£19m)
£229m £269m
Statutory cash flow from operating
activities
Non-recurring cash items
Underlying cash flow from
operating activities
Underlying cash conversion1
£382m £417m
£2m
£2m
£384m £419m
107% 112%
1 Underlying cash flow from operating activities divided by
underlying operating profit.
Going forward, underlying cash conversion will be calculated
using underlying cash from operating activities after operating
capital expenditure. Underlying cash conversion this year is
99% on this basis.
The cash outflow for acquisitions completed in the year
and the purchase of the remaining 25% of Folhamatic
was £65m and there were no disposal proceeds.
A total of £217m (2013: £572m) was returned to
shareholders through ordinary dividends paid of
£126m (2013: £122m) and shares repurchases of
£91m (2013: £251m). In the prior year, a special
dividend was paid of £199m that did not reoccur this
year. Net debt stood at £437m at 30 September 2014
(30 September 2013: £384m), which is equivalent to
1.1x rolling 12-month EBITDA.
Treasury management
The Group continues to be able to borrow at competitive
rates and currently deems this to be the most effective
means of raising finance. During the year, the Group’s
syndicated bank multi-currency revolving credit facility
was renewed to June 2019, the facility level increased
to £510m (US$551m and €218m tranches) (2013: £346m,
US$271m and €214m tranches). At 30 September 2014,
£111m (2013: £10m) of these facilities were drawn, with
the increase primarily due to the completion of an acquisition
in Germany close to the year-end and the purchase of the
remaining 25% of Folhamatic in Brazil.
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Archer Capital
On 14 November 2011, the Group reported a claim for
damages made by Archer Capital (“Archer”) following the
termination of discussions between the Group and Archer
relating to the potential purchase of MYOB. The Group
strongly rejects the claim, which is alleged to be in the region
of £101m (A$188m). The claim was heard by the Court in
late 2013 and judgment is pending.
Events after the reporting date
On 30 September 2014, the Group appointed Citigroup
Global Markets Limited to manage an irrevocable buyback
programme during the close period that commenced on
1 October 2014 and ran up to 3 December 2014.
On 16 October 2014, the Group acquired PAI Group,
Inc. (“PayChoice”), a provider of payroll and HR services
for small and medium sized businesses in the US, for
US$158m (£97m) in cash. The acquisition strengthens
Sage’s position in the large and growing US payroll market.
On 5 November 2014, Stephen Kelly joined the Board
as Chief Executive Officer.
Steve Hare
Chief Financial Officer
Total USPP loan notes at 30 September 2014 were
£432m (US$700m) (2013: £432m, US$700m).
Approximately £123m (US$200m) of USPP borrowings
are due for repayment in March 2015. After the year-end,
the Group has, subject to documentation, priced and
agreed investor allocations for the refinancing of this debt
in the USPP market. The agreed refinancing is US$200m
(£123m) at 3.73% fixed until 2025, €55m (£43m) at 1.89%
fixed until 2022 and €30m (£23m) at 2.07% fixed until 2023.
Acquisitions
On 15 September 2014, the Group acquired 100% of
the share capital of Exact Software Deutschland GmbH
(“Exact Lohn”), a provider of payroll services and software,
for a cash consideration of €16m (£13m). As a result of the
acquisition the Group expects to become one of the leading
providers of payroll software solutions in Germany.
The put and call arrangement to acquire the remaining
25% non-controlling interest in Folhamatic in Brazil was
settled during the year for consideration of £50m, increasing
the Group’s ownership to 100%.
Foreign exchange
The Group does not hedge foreign currency profit and
loss translation exposures and the statutory results are
therefore impacted by movements in exchange rates.
The average rates used to translate the Consolidated
income statement and to neutralise foreign exchange
in prior year figures are as follows:
Average exchange rates
(equal to GBP1)
Euro (€)
US Dollar ($)
South African Rand (ZAR)
Australian Dollar (A$)
Brazilian Real (R$)
2014
2013
Change
1.23
1.66
17.65
1.81
3.81
1.19
1.56
14.60
1.58
3.30
+3%
+6%
+21%
+15%
+15%
Capital structure and dividend
With consistent and strong cash flows, the Group retains
considerable financial flexibility going forward. The Board’s
main strategic priority remains an acceleration of growth,
both organically and through targeted acquisitions, and
investment will support that aim. This growth underpins the
Board’s sustainable progressive dividend policy, with surplus
capital being returned to shareholders from time to time.
Consistent with this policy, the Board is proposing a 7%
increase in the total ordinary dividend per share for the year
to 12.12p per share (2013: 11.32p per share). The ordinary
dividend for the year is covered 1.9x by underlying earnings
per share.
The Sage Group plc | Annual Report & Accounts 2014
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Financial and operating review continued
Regional performance
Europe
Organic revenue growth
France
UKI
Spain
Germany
Sage Pay
Rest of Europe
Europe
2014
+3%
+5%
+1%
+3%
+7%
+3%
+4%
2013
0%
+5%
-2%
+1%
+25%
+8%
+2%
Revenue in Europe grew organically by 4%, with organic recurring
revenue up 7% (2013: 5%) and organic SSRS revenue contracting
by 4% (2013: 2% contraction). Software subscription revenue growth
of 31% is a highlight, with product feature innovation, new tiered pricing
strategies and legislative change acting as subscription catalysts. 75%
of recurring revenue growth came through subscription across both the
SSB and SMB segments, driven by key product initiatives that included
Sage Ciel Flex, Sage 100 i7 and Sage 50 Payroll.
SSRS contraction reflects some substitution effect resulting from
subscription growth this year, which continues the longer-term shift
to higher quality recurring revenue streams. There was also SSRS
contraction in the mid-market that mainly affected France, driven by
a weak new licence performance and a change in sales mix. France
contributes almost 50% of total European mid-market revenue.
France – strong subscription momentum offsets mid-market
weakness
In France, organic revenue grew by 3%, with growth excluding the
mid-market of 4%. Strong subscription momentum remained the
primary driver, with over 40% of France’s recurring revenue base
comprised of software subscription revenue that grew 24% in the year.
Success continues to centre on the Sage 100 i7 upgrade programme,
which is now available across both accounts and payroll, and the tiered
subscription-only Sage Ciel Flex offering. Sage Ciel Flex has been
particularly successful in offsetting a declining performance of the legacy
Ciel product in the retail channel. These initiatives highlight the attraction
of subscription to both SMB and SSB customers respectively.
UKI – value-adding subscription catalysts drives growth
UKI revenue has grown organically by 5%. Subscription is taking hold
in the UKI with growth of 30% in the year, with Sage 50 Payroll in the
SSB segment and Sage 200 in the SMB segment behind this strong
performance. Subscription revenue now represents almost 25% of total
UKI recurring revenue.
Sage One also delivered strong growth in paying subscriptions, which
grew from over 21,000 to 47,000. Whilst Sage One is not yet a material
constituent part of the UKI revenue base, it is an important product in
driving market share growth in the SSB segment.
These good performances were partially offset by a decline in SSRS
revenue, which was boosted last year by the Real-Time Information
(“RTI”) legislative change initiative.
Spain – new pricing strategies and up-selling drive return to growth
Revenue in Spain grew 1% organically after several consecutive reporting
periods of contraction. The recovery was led by a return to SSRS growth,
which contracted by 7% last year alongside modest contraction in
recurring revenue. Sage Murano and Sage Despachos upgrade initiatives
were the primary drivers of this improvement in the SMB and Accountants
segments respectively.
Spain’s return to growth is the result of positive and successful
management action in an economic environment that is still uncertain
despite some signs of improvement. We are now seeing better growth
rates for Sage Contaplus, our flagship SSB product in Spain. This follows
the introduction of new, simplified pricing tiers and software and support
bundles, which have improved renewal rates and encouraged customers
to move to higher value plans.
Germany – improved recurring revenue growth supports growth
In Germany, the rate of organic growth increased to 3%. SSRS
contraction slowed to 2% compared to the prior year contraction of
4%, whilst recurring revenue growth increased to 7% from 5% last year,
reflecting focus on premium support up-selling across several SSB and
SMB products including Sage Office Line.
Sage Pay – growth rate slows after one-off price increase supported
prior year growth
Sage Pay delivered organic revenue growth of 7%. Growth of 25% in the
prior year was primarily due to a price increase made in the second half
of 2012 that is now fully represented in the comparator. The payments
landscape in the UK is highly competitive and this has impacted the rate
of new customer acquisition. Progress around the cross-sell of payments
into the accounting installed base has also been below expectation but
remains an opportunity for 2015.
Rest of Europe
Organic revenue in Portugal grew by 1% (2013: 17%), with prior year
growth largely due to a non-recurring legislative catalyst. Whilst current
year SSRS revenue has therefore contracted by 21% against a strong
comparator, recurring revenue has grown by 19% through focus on
support contract penetration and renewals as customers look to remain
legislatively compliant.
In Switzerland, revenue grew 3% organically (2013: 3%), whilst organic
revenue grew 5% in Poland (2013: 7%).
Organic operating profit
Organic operating profit in Europe increased to £215m (2013: £204m),
representing a margin of 28.6% (2013: 28.1%), primarily as a result of
revenue growth improving operating leverage. The Group continues
to invest in Europe in support of growth, particularly across R&D, S&M
and customer support, whilst reducing the overhead base that supported
non-core products that were disposed of last year.
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Australia
Middle East and Asia
AAMEA
2014
+16%
+6%
+12%
+12%
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+14%
+1%
+11%
+9%
Organic revenue grew strongly in AAMEA at 12%, with organic recurring
revenue growing 14% (2013: 11%) and organic SSRS revenue growing
10% (2013: 7%). South Africa again led the acceleration in growth despite
a marked slowdown in the wider economy.
South Africa – strong double-digit growth performance
Organic revenue growth in South Africa increased to 16%, with the rate
of organic recurring revenue growth accelerating to 19% from 16%, and
SSRS growth increasing to 13% from 12%.
The South African mid-market has continued to perform well, with
Sage ERP X3 and VIP People Payroll the standout products. Payroll
subscription revenue and payments growth drove the acceleration
in recurring revenue growth.
South African growth is also underpinned by annual price increases
that reflect the current rate of inflation of around 6%.
The contribution of revenue from the wider African continent continues
to increase in importance, comprising 13% of total South African revenue
and growing 22% organically (2013: 22%).
Australia, Middle East and Asia
In Australia, we delivered organic revenue growth of 6%, with price
increases on key products Micropay and Handisoft responsible for
the majority of this growth.
The Middle East and Asia grew organically by 12%, with good growth
in the Middle East and Singapore driving performance.
Organic operating profit
AAMEA organic operating profit has increased to £39m (2013: £35m),
although this represents a decrease in margin to 27.2% (2013: 27.4%).
During the year, there was increased investment in headcount across
customer support, professional services and mid-market payroll. There
was also additional investment into the rest of Africa with the opening
of a new office in Lagos. Profitability in AAMEA was largely unaffected
by the non-core product disposals.
Americas
Organic revenue growth
Sage Business Solutions (“SBS”)
Sage Payment Solutions (“SPS”)
North America
Brazil
Americas
2014
+5%
+1%
+4%
+9%
+5%
2013
+6%
+4%
+6%
n/a
+6%
The Americas, where full year results from Brazil are recorded in
organic revenue for the first time, delivered organic revenue growth
of 5%. Organic recurring revenue grew 6% (2013: 7%) and organic SSRS
revenue grew 1% (2013: 2%). The rate of growth in the Americas has
fallen, despite the introduction of high-single digit growth in Brazil,
as a result of a slowdown in the rate of premium support up-selling
and a sharp decline in the rate of growth in Sage Payment Solutions.
SBS – premium support underpins growth
SBS grew organic revenue by 5%. Premium support up-selling remained
the principal driver of growth reflecting focus on migrating tax-only Sage
50 US and Canada customers to the full premium support service in the
SSB segment. The business also delivered growth in the SMB segment
through Sage 100 and Sage 300 premium support initiatives. However,
the overall rate of maintenance and support growth has fallen modestly
as certain upgrade initiatives came to an end during the second half of
the year.
SSRS revenue in the mid-market grew at double-digits as Sage ERP X3
continues to perform strongly in North America. This offset some SSRS
revenue contraction in the SMB segment across the sunset portfolio as
customers migrate to other products that better serve their needs.
SPS – pricing and competitive pressures reduce rate of growth
SPS grew organic revenue by 1%, down from 4% last year, reflecting
a particularly challenging second half of the year. As highlighted with our
third quarter trading update, the slowdown reflects market-wide pricing
pressure driving margin compression through the merchant acquirer
channel and the loss of a signification merchant acquirer partner in the
first half of 2014.
A number of steps have been taken to stabilise margin compression
but the merchant acquirer loss will have a negative impact on revenue
in the first half of 2015. We remain cautious about the growth prospects
of payments going into 2015 and are focused on driving the cross-sell
of integrated payment solutions into the Sage installed base.
Brazil – accounting and payroll software delivers double-digit
growth despite economic slowdown
Organic revenue in Brazil grew by 9%. Accounting and payroll software
revenue has grown in excess of 20% during the year, benefiting from
some legislative change. Technical content revenue growth was low
as the subdued demand for this service continues, with businesses
looking to reduce costs in the face of toughening macroeconomic trading
conditions. We are taking steps to respond to this issue that include
bundling some technical content into the core accounting subscription.
Organic operating profit
Organic operating profit in Americas increased to £106m (2013: £98m),
representing a margin of 25.7% (2013: 25.0%). The increase in margin
is the result of improved operating leverage and controlled expenditure,
particularly around headcount costs. There has also been a strong focus
on reallocation of R&D investment towards Invest products and on
reducing non-core product-related overheads.
The Sage Group plc | Annual Report & Accounts 2014
49
Corporate responsibility
Our Corporate responsibility(cid:98)policy
Our Corporate responsibility (“CR”) activities offer Sage the opportunity
to be a good corporate citizen while supporting our global vision.
Board reporting
Our CR policy has been endorsed by our Board who
are updated on CR risks and opportunities by the
Company Secretary.
Ethics
We are committed to conducting business in an honest
and ethical manner. We act according to our Code of Ethics,
which is integral to us and sets out a range of principles
we adhere to. In particular, we do not tolerate bribery and
corruption and are committed to acting professionally,
fairly and with integrity in all our business dealings and
relationships. We enforce effective systems and processes
to counter bribery and corruption and we continue to
create new ways for employees to anonymously report
any related concerns.
As a UK company, The Sage Group plc is bound by the
laws of the UK, including the Bribery Act 2010, in respect of
our conduct both at home and abroad. In addition, we will
uphold all laws relevant to countering bribery and corruption
in all the jurisdictions in which we operate.
As well as ensuring our own conduct is appropriate, we
have also put in place procedures to prevent bribery being
committed on our behalf by any associated persons,
particularly in our subsidiaries, and third parties we work
with. Our leaders sign a declaration relating to the Code of
Ethics to make sure any additional business commitments
or client and supplier relationships they may have are clear
and transparent.
Data protection
We take data security and privacy seriously. Customer
data is handled sensitively, with respect, and in a way
that complies, as a minimum, with the requirements of
data protection laws in the countries in which we operate
and, where appropriate, regional legislation. We also
work with local legislative bodies and data protection
agencies and continuously look to strengthen our systems
and procedures.
Our global CR policy focuses on four key areas where we
believe we can make the most difference. For three of these
– People, Environment and Industry – we have established
a global framework for our operating companies to work
within, allowing them flexibility over which area to invest in
according to what will have the most meaning and impact
locally. Whilst local legal standards apply as an absolute
minimum, we aim to achieve good practice in our local
markets and share this across the Group. The fourth area
– Community – is entirely locally driven, allowing our people
to support causes close to them and to become involved
in their communities.
Sage has been independently assessed against the
FTSE4Good criteria and satisfied the requirements to
become a constituent of the FTSE4Good Index Series,
which is an equity index designed to facilitate investment
in companies that meet globally recognised corporate
responsibility standards.
People
Given the nature of our business we have not included
information specifically about human rights issues in
this report. We have a Code of Ethics, available at
www.sage.com, which recognises the importance of
treating all of our employees fairly, covering issues such as
responsible employment, diversity and equal opportunities.
This is an effective way of communicating, at a high level,
the principles which should be applied in the conduct
of our business.
Environment
We continue to analyse our impact on our environment.
We remain committed to reducing our energy consumption
and related emissions where possible, as well as reducing
the wider impact we have through the use of resources
and how much landfill waste we generate.
Industry
We aim to leverage the unique relationships that we
have with our customers across the globe to continue to
understand and support the issues and challenges that
they face.
Community
Our local communities are important to us. We support a
number of charities and community organisations worldwide
in order to make a positive impact on the communities
where we have a presence. Our employees are dedicated
to raising funds for charity and volunteering their time to help
the local community.
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People
Our vision is to be recognised as the most valuable supporter of small
and medium sized companies by creating greater freedom for them to
succeed. Our people pride themselves on delivering an extraordinary
customer experience to underpin this vision.
They are also proud to work at Sage and, in turn, we are committed to
leveraging, developing and recognising talent across our organisation.
Guiding principles
Our guiding principles drive our culture and shape how we think, plan, behave and make decisions.
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Simplicity
Maintaining simplicity in a complex world is challenging, but we believe it is vital to work in an organisation
where things are clear, easy to understand and direct. We believe it creates an environment that is more
relaxed and that frees people to perform to their potential.
Agility
Business is fast-paced and ever changing, so when customers need us we have to respond quickly and
efficiently. However, being reactive isn’t enough. We believe in a more proactive approach, which requires
us to anticipate and interpret our customers’ needs so that we’re ready to meet them. Having the agility to
find relevant, effective solutions and deliver them at the right time is what sets us apart.
Innovation
We’re always looking at new ways to improve the customer experience. From product innovation to how
we work together, creativity can make all the difference. That’s why we encourage our teams to explore
innovative ideas, because our future success depends on it.
Trust
By using Sage products our customers are committing to us, so they must be able to trust us to deliver.
Our customers need to know we are on their side, providing tailored products and services that meet their
needs and offering expert advice and support to help them run their businesses.
Integrity
Whether we are providing software products to our customers or giving them business advice and support,
integrity is central to maintaining our credibility. It is about delivering on our promises, being reliable and
maintaining the highest of standards. That is how we build trust and loyalty with our customers.
The Sage Group plc | Annual Report & Accounts 2014
51
Corporate responsibility continued
People continued
Building inner confidence
We are committed to making Sage an inspiring and
engaging place to work. Our brand is all about creating
business confidence for our customers – so it is important
that our people all have the "inner confidence" needed to
ensure that we deliver this to our customers.
Our people therefore require the right training, the right
tools to do the job, feel supported by their managers and
understand how their work fits with what we are trying
to achieve as a business. We try hard to create this
environment but there is always more we can do.
In February 2014, we launched our first global People
Survey. 82% of our people – around 10,600 employees –
responded, so we are confident that the results give a clear
and true reflection of how our people feel about working at
Sage. The results have provided us with a real insight into
what is working well for our people as well as some key
areas for us to focus on. Work is well underway across
our business to develop action plans and a further interim
survey will take place in early 2015 to track our progress.
Redefining the Sage Employee Value Proposition
As part of our ongoing commitment to making Sage a
great place to work we have initiated a global project to
redefine the Sage Global Employer Brand and Employee
Value Proposition ("EVP"). We have engaged our people
through focus groups and workshops to understand
what is important to them so that we can define our core
proposition. We will be establishing a clear framework
to enable us to bring our EVP to life consistently across
the business and at all points of the employee experience
life cycle.
Equipping our people for change
Ensuring our people are equipped with the relevant skills and
training is a key focus. In many regions we’ve invested heavily
in bespoke learning and development to ensure our people
continue to deliver an extraordinary customer experience.
In Spain, the Sage Sales University provides a platform
to ensure employees are clear on business priorities and
targets. It also provides a networking opportunity so that
colleagues can learn from one another’s experiences.
In North America, employees within R&D benefit from
expanded learning tools, including an online learning platform
that provides real time, online access to enhance technical
skills and applications.
We’ve also implemented a number of programmes to
improve our capabilities in support of our customers,
including investing in technical skills and cross-training
of our support teams to extend coverage beyond a single
product. For example, in North America, nearly half of
our analysts are able to serve customers across multiple
products, enhancing their engagement, talents and value.
Transforming the way we work
Our global strategy requires us to transform the way that we
work. As cloud technology evolves to make data accessible
anywhere and on any device, Sage is responding by
providing customers with flexibility and choice to take
advantage of these technologies.
This has resulted in more people working across traditional
boundaries with a greater need to share and access
common data, as we see increasing levels of global
collaboration to deliver our strategic initiatives.
We are investing in technology to support these new ways
of working, particularly by leveraging common platforms
and enabling our people to take advantage of the cloud.
At a regional and country level we are also streamlining our
systems and processes to ensure we achieve our goals. We
are aligning our finance functions across North America and
Europe to best meet the needs of the business and we’re
exploring ways in which we can leverage our scale using
common ERP systems.
Sage People Survey
We are confident
that our results give
a clear and true
reflection of how our
people feel about
working at Sage.
10,600
77%
82% employees
responded to the survey
of respondents are
proud to work at Sage
73%
of our people
understand our
business strategy
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In North America we have implemented a new Human
Capital Management System to provide a consistent system
of record across the region whilst linking seamlessly with
other HR and Finance tools. In support of this work and the
increasing collaboration and efficiency it represents, we now
have a Chief Information Officer responsible for both North
America and Europe.
A further example of integration and sharing best practice
is the launch of the first phase of a cloud-based global
performance management system, which builds on work
initiated in North America, for the benefit of teams across
the world.
We are also looking at ways in which Office 365 can
enable our people to connect globally, access news and
information, share insights and provide feedback to help
facilitate the delivery of our vision and strategy.
As well as supporting us in achieving our business ambitions,
these projects and initiatives generate improvements for our
global Sage community and provide further professional
growth and career development opportunities.
Recognising our people
Sage strives to provide a work environment where our
people feel valued and appreciated in order to help attract,
motivate and retain the talent required to achieve our goals.
We continue to recognise and celebrate success and this
year we launched the Sage Europe awards to recognise
the contribution and outstanding performance of over 7,000
employees in that region in bringing our strategy to life. The
awards build on existing country-based programmes, such
as the Sage Guiding Principle Awards, which are well
established within our Sage UKI organisation.
In South Africa, we recognise employees’ contribution
to success through a range of monthly, quarterly and
annual awards. Employees are invited to an annual
"Oscars" weekend as thanks for their hard work and
dedication, where awards are presented to recognise
outstanding performance.
In North America, in addition to existing programmes
such as the Extraordinary Customer Experience awards,
several targeted programmes were implemented this year
to acknowledge employees’ time, talents and effort. The
Customer Experience Honors programme recognises
and rewards customer-facing support and service team
members for the value they deliver as part of our Sage
Advisory Level Services.
Developing our talent
To meet the needs of our global strategy we have taken a well-planned
approach to the development of our talent.
Across our leadership population we have continued to implement
our global talent management process "Talking Talent" to assess
capabilities, identify talent strengths, risks and opportunities as well
as targeted succession planning for key roles. We continue to invest
in leadership evaluation and have increased our investment in
performance management.
Our approach has identified internal successors for key senior roles
in the organisation, including the recent appointment of our Chief
Marketing Officer, Santiago Solanas, and our Mid-market Europe
Chief Executive, Jayne Archbold.
We have extended our programme beyond the Top 100 leaders to
nearly 200 leaders in Europe and we are taking this further into the
business and across all regions to gain a better understanding of key
talent. In North America, this process has been widened to include
key roles within R&D, Sales Operations and Product Management that
align closely to strategic performance.
In addition, we have rolled out several leadership development
programmes at a global and regional level including Confident Leader,
Leading Change, Creating a High Impact Performance Environment
and Leading and Working in a Matrix Environment.
Global mobility is playing an increasing role in transferring skills and
knowledge across Sage and our approach enables us to close skills
gaps, address talent shortages and fuel business growth around the
world. At the same time, the employee benefits from the opportunity
to experience a new culture, bring their skills and experience to
a new group of colleagues and projects, and accelerate their
own development.
Examples of where global talent has been deployed include
leveraging expertise between regions through the deployment of
senior executives and other key talent to assist with strategic projects.
We encourage the sharing of knowledge, experience and success
as a way of improving our approach to new products, initiatives
and projects.
Santiago Solanas, Group Chief Marketing Officer
The Sage Group plc | Annual Report & Accounts 2014
53
Corporate responsibility continued
People continued
Diversity
Sage customers come from many nationalities and
backgrounds and our commitment is that Sage people
will reflect their diversity.
We will demonstrate our commitment by:
– Promoting equal opportunity for our current and
potential team members
– Reflecting the communities in which we work
– Aiming to build teams which reflect the diversity
of our customers
– Treating our customers, partners and team members
fairly and with respect
– Promoting an environment free from discrimination,
bullying and harassment, and tackling any behaviour
which may breach this intent
– Providing support and encouragement to our people
to develop their careers and increase their contribution
to Sage and our customers
We will provide equal opportunity to all our people and will
not tolerate discrimination on grounds of gender, gender
identity, marital status, sexual orientation, race, colour,
nationality, religion, age, disability or any other grounds
other than performance.
Year-end employee count split by region1
20132
2014
1 Figures shown are on an organic basis.
We will regularly assess and refocus our effectiveness
in reflecting the diversity of our customers, and strive
to improve all the time.
Gender
We continue to value the aims and objectives of The Davies
Report on Women on Boards. In considering appointments
to the Board and to senior executive positions, it is our policy
to evaluate the skills, experience and knowledge required by
a particular role with due regard for the benefit of diversity on
the Board and at senior management level and make an
appointment accordingly.
Following the appointment of Inna Kuznetsova as a
Non-executive Director in March 2014 we have 25% female
representation at Board level. Our top leadership population
is 22% female, and this proportion is higher within the
majority of our core operating companies. 46% of our
total workforce profile is female. Examples of some local
gender-specific initiatives include Spain’s Equality Plan and
the UKI’s Enterprise for Women network aimed at supporting
and encouraging career development of women through
networking events and workshops.
Europe
7,063
7,114
Americas
3,546
3,585
AAMEA
2,006
2,134
Group and
central
operations
145
142
Total
12,760
12,975
2 Last year, employees and associated costs attributable to Sage ERP X3 were disclosed as part of Group and central operations. This year they
are included as part of Europe. 2013 fi gures have been restated on a like-for-like basis.
Board diversity
Top leadership diversity
Total workforce diversity
Men
Women
% Men
% Women
2014
2013
6
2
6
1
75%
25%
86%
14%
Men
Women
% Men
% Women
2014
2013*
127
36
78%
22%
114
33
78%
22%
Men
Women
% Men
% Women
2014
2013
7,017
6,830
5,958
5,930
54%
46%
54%
46%
* Prior year top leadership diversity fi gures have been restated on a like-for-like basis with the current year to include all employees who are
registered directors of one or more Group companies. The previously reported numbers of 84 men and 27 women captured employees who
fulfi l a leadership role in delivering global strategy. However, not all employees who are registered directors of one or more Group companies
fall into this category.
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Environment
We aim to reduce the energy our business uses and make the most of
recycling opportunities. We comply with local laws as a minimum standard
and Sage continues to take part in the global Carbon Disclosure Project.
Greenhouse gas emissions
This section includes our mandatory reporting of
greenhouse gas emissions pursuant to the Companies
Act 2006 (Strategic Report and Directors’ Report
Regulations 2013 (the “Regulations”)). We include this
reporting data here in order to provide a complete
CR picture.
Reporting year
We have defined our greenhouse gas emissions reporting
year so that it aligns with our financial year, being 1 October
2013 to 30 September 2014.
Global greenhouse gas emissions data
For period 1 October 2013 to 30 September 2014
Emissions from:
Combustion of fuel and
operation of facilities
Electricity, heat, steam and
cooling purchased for own use
Company’s chosen
intensity measurement:
– Emissions reported above
Tonnes of CO2
Equivalent (CO2e)
FY14
FY13
9,238
9,550
15,796
17,943
normalised to tonnes of CO2e
per total GBP£1,000,000 revenue
19.16
19.98
Organisation boundary and responsibility
We report our emissions data using an operational control
approach to define our organisational boundary which meets
the definitional requirements of the Regulations in respect of
those emissions for which we are responsible.
We have reported on all material emission sources for
which we deem ourselves to be responsible. These sources
align with our operational control and financial control
boundaries. We do not have responsibility for any emission
sources that are beyond the boundary of our operational
control. For example, business travel other than by car
(including, for example, commercial flights) is not within
our operational control and, therefore, is not considered
to be our responsibility.
Methodology
The methodology used to calculate our emissions is based
on the “Environmental Reporting Guidelines: including
mandatory greenhouse gas emissions reporting guidance”
(June 2013) issued by the Department for Environment,
Food & Rural Affairs (“DEFRA”). We have also utilised
DEFRA’s 2014 conversion factors within our reporting
methodology. In some cases, we have extrapolated total
emissions by utilising available information from part of a
reporting period and extending it to apply to the full reporting
year. For example, this has occurred where supplier invoices
for the full reporting year were not available prior to the
publication of this year’s Annual Report & Accounts. For
further details, our methodology document can be found at
www.sage.com/about-sage/corporate-social-responsibility.
The Sage Group plc | Annual Report & Accounts 2014
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Corporate responsibility continued
Environment continued
Scope of reported emissions
Emissions data has been reported for all the Group’s
operations in Australia, Austria, Belgium, Brazil, France,
Germany, Ireland, Malaysia, Morocco, North America,
Poland, Portugal, Singapore, South Africa, Spain,
Switzerland, the United Arab Emirates and the UK.
Intensity ratio
In order to express our annual emissions in relation to
a quantifiable factor associated with our activities, we
have used revenue in our intensity ratio calculation, as
this is the most relevant indication of our growth and
provides for a good comparative measure over time.
In the prior year, given the short time between the passing
of the Regulations and the preparation of the report, it
was not possible to report on all emissions. We have put
the following procedures in place to enable us to report
on a wider range of emissions this year:
– Development of a Group-wide mandatory
greenhouse gas reporting manual
– Roll-out of Group-wide training sessions
– Country level review procedures
– Group-level quality reporting
The emissions that have not been included in this year’s
report relate to building usage in our operations in
Belgium and the United Arab Emirates, where energy
usage is not itemised on invoices. We have also not
included emissions derived from refrigerant gas usage in
relation to our operations in XRT Brazil, Singapore and the
United Arab Emirates, as this information has not been
gathered throughout the reporting year.
Baseline for 2014 targets
The 2013 data forms the baseline data for
subsequent periods.
Carbon Disclosure Project
We once again took part in this project during the year under
review by reporting our gas (Scope 1) and electricity (Scope 2)
emissions for the financial year ended 30 September 2013.
Reducing carbon and waste
We have continued to make a concerted effort to reduce
our carbon footprint. For example, across our business we
have continued to focus on the reduction of business travel
emissions by:
– Introducing a new car travel policy
– Purchasing new, more fuel efficient fleets
– Introducing the use of bio-ethanol
– Promoting the use of rail travel
– Installing more offices with motion sensor LED lights
– Restricting heating to working hours in many
of our sites
Total CO2e by type
Sum of CO2e
(tonnes)
7,539
6,607
Europe
1,075
AAMEA
624
North America and Brazil
4,724
4,465
Combustion of fuel and
operation of facilities
9,238
Electricity, heat, steam and
cooling purchased for own use
15,796
Combustion of fuel and operation of facilities
Electricity, heat, steam and cooling purchased for own use
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
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Industry
We pride ourselves on really understanding our customers, both their
common needs and their unique requirements, and we look to deploy
that empathy and insight in our CR activities.
30,000+
conversations each day
with our customers
13,710
businesses polled for
our Sage Business Index
Understanding the issues small and medium
sized businesses face
Having a clear understanding of the challenges our
customers face is important to us to ensure our products
and services meet their needs. In addition to the over
30,000 conversations we have each day with our customers
through our support offering, we also conduct regular
research and surveys, both locally and globally, to collect
as much insight and information as we can.
Our global Sage Business Index survey helps us remain
close to what matters most to SMEs. This year we surveyed
close to 14,000 businesses across 18 countries, providing
a comprehensive study of business confidence and the
pressures faced by decision makers within companies
around the world.
Local markets also carry out their own research allowing
Sage to gain an insight into individual markets and adapt
our business to support them. For example, in Spain we
carry out "Sage Observatory", a collection of four annual
surveys learning about how technology, the government
and the economy are affecting SMEs in Spain.
Supporting local businesses and organisations
Our vision of being the most valuable supporter of small and
medium sized businesses means helping them understand
and navigate through the business challenges they face. This
year we launched our global Business Navigators campaign,
which aims to raise awareness and promote the benefits
mentoring can have on business growth and success.
Locally we sponsor different organisations which are aiding
small and medium sized businesses. For example, in the UKI
we are sponsoring Europe’s first £1m technology accelerator
programme, Ignite 100, to support technology start-ups
in Newcastle, who are encouraged to join an 18-week
accelerator programme. As well as £10,000 funding, Sage
offers guidance and expert advice to the Ignite 100 start-ups.
In North America we support the National Association of
Women Business Owners annual event and conference,
whose aim is to support women business owners and give
them the power to succeed. We encourage education in
our industry through events such as the Economics and
Management week, and through our work with the South
African Institute of Chartered Accountants ("SAICA"). Sage
also hosts online forums and information sessions throughout
the year, providing knowledge on economic and legal
changes that are affecting SMEs.
Ignite 100
Sage provided £10,000 funding to Ignite 100, Europe’s first
£1m technology accelerator programme, as well as providing
guidance and expert advice to Ignite 100’s start-ups.
£10,000
funding for Ignite
“I’m delighted that Sage is now leading the way by working
with Ignite 100 to support early-stage technology start-ups.
Sage has inspired plenty of entrepreneurs in the past.
Now that it is actively supporting technology businesses
in Newcastle through community support and mentoring,
it will continue to do so in the future.”
— Paul Smith, co-founder and director of Ignite 100
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Corporate responsibility continued
Industry continued
Helping non-profit organisations with business software
is also high on our agenda. In North America, Sage has
continued a partnership with TechSoup, an organisation
that provides free business software to not-for-profit
organisations. This year alone, Sage has donated software
to 438 organisations, with a value of $221,000 (£135,000),
twice as much as the previous year.
We also support our customers by providing them with
opportunities they would not usually have. This year we
launched the “Bag yourself a Billboard” competition through
which the UK-based online creative community, Gather.ly,
won a £100,000 advertising space in London’s tech city
to help boost their business.
Developing the entrepreneurs of tomorrow
We believe passionately in the value of developing future
talent, both within Sage and in the wider business community.
We work with a number of organisations to help nurture the
entrepreneurs of tomorrow, such as the Junior Achievement
Foundation in Spain which gives university students the
experience of developing their own company. Twenty Sage
volunteers worked with the 152 students who took part and
guided four projects through to the national competition.
In South Africa, we continue our support of the Life
College, which focuses on developing emotional intelligence,
entrepreneurship and leadership in youth. We continue to
sponsor their annual event, The Life College Xchange, a
competition where students are provided with seed capital
to launch a small business. The event also gives students
the chance to network and learn from business experts. In
Portugal we support Vodafone Labs Lisboa, Start-up Lisboa
and Start-up Campus campaigns, which all work towards
the development of entrepreneurs.
Throughout the business we develop the new talent of
tomorrow through apprenticeships. In the UKI, we take
on 12 apprentices each year, offering valuable learning
opportunities for students to build a career. In South Africa,
in addition to our long-standing partnership with SAICA,
through the Thuthuka programme we identify students with
an aptitude for maths, science and accounting. The winner
is awarded the Olympiad prize, including a full bursary from
Sage to further their education in accountancy. In South
Africa, we also provide a full bursary and three-week vacation
scheme to a student studying either an accountancy or
technology-related course through the Tomorrow Trust.
12
Apprentices in the UKI
438
Organisations Sage has
donated software to
David Milstead, UK Apprentice
David Milstead, 22, is one of our 12 apprentices in the UK with a passion for coding and
product development. On deciding university wasn’t for him, he found the Sage apprenticeship
scheme was the right path to develop his skills and build a career. David is now a key member
of our research and development team.
“I’m really enjoying the apprenticeship(cid:98)and software
development is definitely the career path for me. I’d like
to go on to a junior developer’s role so I can progress my
career through to senior developer and manager.”
– David Milstead
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Community
Our involvement in local communities is about more than business, so
we empower our operating companies to set their own targets and goals
because they know best what will really make a difference locally.
Giving our time to help charities
We support a number of charities and community
organisations locally and globally. Moreover, our people
love taking the opportunity to dedicate some of their time
to the local causes that matter to them. In North America
and the UKI, through the Volunteer Day Benefits programme,
our employees are given paid days off to volunteer on
programmes such as Right to Read and Code Club,
where they support, teach and develop children’s
learning and skills.
Sage Day is an annual event in July, where our employees
have the opportunity to get involved in local communities and
charity work together. This year, in South Africa, it coincided
with Mandela Day, so our employees chose to raise money
to purchase homeware through Sage Day, with 50
volunteers visiting Afrika Tikkun’s Diepsloot community
centre to deliver the parcels of homeware and entertain
the children.
Our operating companies also come up with unique and
fun ways to raise money. In South Africa, we host an annual
Shave-athon to support the Cancer Association of South
Africa, who carry out research to find cures and treatments
for cancer patients. This year we raised R135,000 (£8,000).
In the UKI, our employees took part in three annual bike
rides: Coast to Coast, London to Paris and London to
Alpe d’Huez. They raised an impressive £24,000 for
Cancer Research, contributing to a total of £668,000
over our eight-year partnership.
We also do more than just donate funds. For example,
our team in Spain continued their annual support of the
National Food Bank, donating 400 kilos of food this year.
We held a food donation day in Portugal in partnership with
Kelly Services as well as donating 800 toys to children with
cancer through the One Toy One Smile campaign.
Throughout the business, we also have initiatives in place
to encourage our employees to continue supporting the
community through matching donations, providing personal
sponsorship and encouraging them to vote for the
charities we should support.
Investing in young people
Sage has always believed in the talent of tomorrow and this
is seen through our support of apprentices and bursaries.
In South Africa, we have a long-standing joint initiative with
Penreach Trust and King David School Foundation. Sage’s
support provides training and resource materials for
educators in rural or disadvantaged areas to help deliver
a better education. This year, in South Africa, we have
sponsored the installation of a library at Dr Beyer Naude
School in Soweto, with employees donating books. In
Portugal, we also held a book donation initiative labelled
“reusing is better than recycling”.
Afrika Tikkun Diepsloot community centre
In South Africa, Sage has supported Afrika Tikkun, a well-established non-governmental
organisation which works in six of the most impoverished communities in South Africa, for
the past six years. This year our staff raised funds during Sage Day to buy homeware for
the Diepsloot community and donated their time to visit the community centre.
“Thank you very much for making a difference to the families
that received your gifts. The warmth and artistic flair of the
Sage staff left many of our children with smiles on their
faces. These are moments of magic that allow some of our
children to forget about some of the hardships they are
faced with on a daily basis and enjoy life.”
– Afrika Tikkun
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Strategic report
Our 2014 Strategic report, from
page 2 to page 59, has been reviewed
and approved by the Board of
Directors on(cid:98)3 December 2014.
Steve Hare,
Chief Financial Officer
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Chairman’s introduction to Corporate governance
Dear Shareholders
It also involves the creation of a sensitive interface for the views
of shareholders and other stakeholders to be given appropriate
consideration when reaching these judgements.
The executive team is required to provide such information to the
Board as the Board needs to enable it to exercise its judgement over
these matters. It must also evidence appropriate process. There is a very
fine distinction between the approval of processes and their definition.
Only exceptionally would the Board intervene to initiate or define.
The Board also sets the tone for the Company. The way in which it
conducts itself, its attitude to ethical matters, its definition of success
and the assessment of appropriate risk, all define the atmosphere
within which the executive team works.
Good corporate governance is not about adhering to codes of practice
(although adherence may constitute a part of the evidence of good
governance) but rather about the exercise of a mindset to do what is
right. One of the challenges facing any Board is the way in which the
non-executive and the executive directors interact. It is clear that they
each have the same legal responsibility but it is generally unrealistic to
expect executive directors to speak individually with the same freedom as
the non-executive directors. Equally, executive directors who just “toe the
executive line” in contradiction to their own views may not be effectively
contributing to good governance. A well-functioning Board needs to find
the right balance between hearing the collective executive view, being
aware of the natural internal tensions in an executive team and allowing
independent input from the non-executive directors.
One of the consequences of both increasing the watchdog role of the
Board and finding this balance between individuality and team behaviour
is driving more and more Boards to have fewer and fewer executive
directors. In our circumstances as a holding company for a number of
businesses, the reduced Board size works effectively and an appropriate
balance is struck.
Notwithstanding the tensions created by many external expectations,
which may be wholly or in part unrealistic, a successful Board should,
ideally, be composed of a group of respected, experienced, like-minded
but diverse people who coalesce around a common purpose of
promoting the long-term success of the company, provide a unified vision
of the definitions of success and appropriate risk, endeavour to support
management (i.e. those who honestly criticise at times but encourage all
the time) and who create confidence in all stakeholders in the integrity of
the business.
Donald Brydon, CBE
Chairman
The Board of the Company is committed to ensuring that it provides
effective leadership and promotes uncompromising ethical standards.
One of the ways in which the Board achieves this is by requiring that
good governance principles and practices are adhered to throughout
the Company. The Board determined that the following is a helpful
summary of its role:
Good governance is about helping to run the Company well. It involves
ensuring that an effective internal framework of systems and controls
is put in place which clearly defines authority and accountability and
promotes success whilst permitting the management of risk to
appropriate levels.
It also involves the exercise of judgement as to the definitions of success
for the Company, the levels of risk we are willing to take to achieve that
success and the levels of delegation to the executive.The exercise of this
judgement is the responsibility of the Board and involves consideration of
processes and assumptions as well as outcomes.
Compliance with the UK Corporate
Governance Code 2012 (“the Code”) and
its statement requirements
Throughout the financial year ended 30 September 2014 and
to the date of this report, Sage has complied with the provisions
of the Code, including updates which have applied since our
year-end. The Code is publicly available at the website of the
UK Financial Reporting Council at www.frc.org.uk. This corporate
governance section of the Annual Report & Accounts describes
how we have applied the principles of the Code.
The Sage Group plc | Annual Report & Accounts 2014
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Board of Directors
Donald Brydon (69)
Stephen Kelly (52)
Steve Hare (53)
Ruth Markland (61)
Chairman
Appointed to the Board:
6 July 2012
Experience:
Donald had a 20 year career
with Barclays Group, during
which time he was Chairman and
Chief Executive of BZW Investment
Management, followed by 15 years
with the AXA Group, including
the posts of Chairman and
Chief Executive of AXA Investment
Managers and Chairman of
AXA Framlington. He has also
recently chaired the London Metal
Exchange, Amersham plc, Taylor
Nelson Sofres plc, the ifs School
of Finance, Smiths Group plc and
is a past Chairman of EveryChild.
Donald has also served as
Senior Independent Director
of Allied Domecq plc and
Scottish Power plc.
Other current appointments:
– Royal Mail plc – Chairman
– Medical Research
Council – Chairman
Board Committees:
– Nomination Committee (Chair)
– Remuneration Committee
Chief Executive Officer –
Executive Director
Appointed to the Board:
5 November 2014
Chief Financial Officer –
Executive Director
Appointed to the Board:
3 January 2014
Senior Independent
Non-executive Director
Appointed to the Board:
13 September 2006
Experience:
Stephen has over 30 years’
leadership experience in the
SME and technology sector.
He has previously served as
Chief Executive Officer of two
high-growth, public software
companies – NASDAQ listed
Chordiant Software, Inc. from
2001 to 2005 and LSE listed Micro
Focus International plc. from 2006
to 2010. In 2012 he was appointed
Chief Operating Officer for UK
Government where he was the
most senior executive responsible
for the UK Government’s Efficiency
& Reform agenda, including
Digital, Commercial, IT and
SME strategies.
Stephen has been an angel
investor and director in a
number of high growth start-ups
(including Deloitte UK Technology
Fast 50 Award winners).
Experience:
Prior to joining Sage, Steve was
Operating Partner and Co-Head
of the Portfolio Support Group
at the private equity firm Apax
Partners, which he joined in 2009.
Before his work at Apax Partners,
he built over 10 years’ experience
leading the finance function
for three listed UK companies
culminating as CFO for FTSE 100
company Invensys plc from 2006
to 2009. Between 2004 and 2006
Steve was Group Finance Director
for Spectris plc, the FTSE 250
precision instrumentation and
controls company and from 1997
to 2003 he was with Marconi PLC,
serving as CFO from 2001.
Steve qualified as a Chartered
Accountant in 1985 with
Ernst & Whinney, now part
of Ernst & Young.
Experience:
Ruth has over 30 years’
experience of international
services businesses, and has
held a number of non-executive
director positions. She joined
Freshfields in 1977 and served
as Managing Partner of Asia at
Freshfields Bruckhaus Deringer
from 1996 to 2003. She also
served as the Chairman of
the Board of Trustees at the
WRVS until November 2012.
Other current appointments:
– Standard Chartered plc –
Senior Independent Non-
executive Director
– Arcadis NV – member
of the Supervisory Board
Board Committees:
– Audit Committee
– Nomination Committee
– Remuneration
Committee (Chair)
Changes to the Board
In the financial year to 30 September 2014 and to the date of this report, there have been the following changes to the Board of Directors:
Executive directors
Steve Hare
Guy Berruyer
Stephen Kelly
CFO
CEO
CEO
Appointed on 3 January 2014
Retired on 5 November 2014
Appointed on 5 November 2014
Non-executive directors
Drummond Hall
Inna Kuznetsova
Ian Mason
Mark Rolfe
Appointed on 1 January 2014
Appointed on 6 March 2014
Retired on 30 November 2013
Retired on 30 November 2013
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Inna Kuznetsova (46)
Jonathan Howell (52)
Neil Berkett (59)
Drummond Hall (65)
Independent
Non-executive Director
Appointed to the Board:
6 March 2014
Independent
Non-executive Director
Appointed to the Board:
15 May 2013
Independent
Non-executive Director
Appointed to the Board:
5 July 2013
Independent
Non-executive Director
Appointed to the Board:
1 January 2014
Experience:
Inna is former Chief Commercial
Officer and Executive Board
member at CEVA Logistics, where
she worked from 2012 until 2014.
Prior to joining CEVA, Inna spent
19 years at IBM, where she held a
number of different roles focusing
on building and running strong
organisations in sales, business
development and marketing,
culminating as Vice-President,
Marketing & Sales Enablement,
IBM Systems Software and ISVs.
Other current appointments:
– None
Board Committees:
– Audit Committee
– Nomination Committee
– Remuneration Committee
Experience:
Jonathan is currently Group
Finance Director of Close Brothers
Group plc, joining in February
2008, and previously held the
same position at the London
Stock Exchange Group plc from
1999. Jonathan has also been
a non-executive director of
EMAP plc and Chairman of
FTSE International. The early
part of his career was at Price
Waterhouse where he qualified
as a chartered accountant.
Other current appointments:
– Close Brothers Group plc –
Group Finance Director
Board Committees:
– Audit Committee (Chair)
– Nomination Committee
– Remuneration Committee
Experience:
Previously Drummond was Chief
Executive of Dairy Crest Group plc
from 2002 to 2006, prior to which
the majority of his career was spent
with Procter and Gamble, Mars
and PepsiCo. Drummond was a
non-executive director of Mitchells
& Butlers plc from July 2004 to
January 2010 and Chairman from
June 2008 to November 2009.
Other current appointments:
– WH Smith plc –
Senior Independent
Non-executive Director
– First Group plc –
Senior Independent
Non-executive Director
Board Committees:
– Audit Committee
– Nomination Committee
– Remuneration Committee
Experience:
Neil has over 30 years’
experience in a wide range of
highly competitive consumer
industries. Most recently, he was
Chief Executive of Virgin Media
Group from March 2008 to June
2013, having joined ntl, Virgin
Media’s predecessor, as Chief
Operating Officer in September
2005. Before ntl he was Managing
Director, Distribution, at Lloyds TSB
plc. His previous roles include Chief
Operating Officer at Prudential
Assurance Company Ltd UK,
Head of Retail at St George Bank,
Senior General Manager at the
Australian division of Citibank
Limited, Chief Executive at
Eastwest Airlines Australia and
Financial Controller at ICL Australia.
Other current appointments:
– Guardian Media Group –
Chairman
– Bank of Queensland Ltd –
Non-executive Director
– NSPCC – member of the
Board of Trustees
Board Committees:
– Audit Committee
– Nomination Committee
– Remuneration Committee
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Executive Committee
Stephen Kelly
Steve Hare
Richard Drury
Ivan Epstein
Santiago Solanas
Pascal Houillon
Alvaro Ramirez
Michael Robinson
Klaus-Michael Vogelberg
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Stephen Kelly (52)
Chief Executive Officer, Board of Directors
For Stephen Kelly’s skills and experience see page 62.
Steve Hare (53)
Chief Financial Officer, Board of Directors
For Steve Hare’s skills and experience see page 62.
Richard Drury (52)
Group Human Resources Director
Based: UK
Experience:
Richard is responsible for leading human resources at Sage. His role
is to develop and lead the implementation of our global strategy for
organisational design, reward, leadership development, performance,
talent, employee engagement and internal communications. Richard
joined Sage in June 2013 from technology business Invensys plc, where
he held a number of human resources leadership roles including Group
Human Resources Director, and was responsible for providing services
to over 21,000 employees across Europe, the Americas, Asia and the
Middle East. Prior to Invensys, Richard worked in human resources in
Whitbread’s hotel and pub retail businesses and with British Airways,
where he held both HR and customer services leadership roles.
Ivan Epstein (54)
Chief Executive Officer, AAMEA
Based: South Africa
Experience:
Ivan leads Sage’s businesses across Australia, Africa, the Middle East and
Asia, which include some of Sage’s highest growth countries. Starting his
career at Price Waterhouse, Ivan then co-founded Softline in 1988 leading
it from start-up to a listing on the Johannesburg Stock Exchange in 1997.
Softline was delisted and acquired by Sage in 2003, when Ivan joined the
Executive Committee as CEO of the Southern Hemisphere, becoming
CEO of AAMEA in 2010. Amongst his accomplishments, Ivan has
been awarded the Ernst & Young “South Africa’s Best Entrepreneur”
accolade in 1999/2000 in recognition of his entrepreneurial attributes
and contribution to South African business. He was also awarded the
Computer Society South Africa “IT Personality of the Year” accolade in
2009 for his contribution to the IT sector.
Santiago Solanas (46)
Chief Marketing Officer
Based: Spain
Experience:
Santiago has recently been appointed as Group CMO, after seven years
with Sage. He has been CEO of Sage Spain for the past four years,
renewing the leadership team, restructuring the business, increasing its
efficiency and returning it to growth in difficult economic circumstances in
Spain. During this time he has also been the Accountants Segment leader
for Europe and has led the brand roll-out for the region. He joined Sage in
2007 as Managing Director of the SSB division in Spain, after a career of
over 20 years in the IT and software industry, including brand, sales and
marketing management roles at Oracle, Microsoft and IBM.
Pascal Houillon (52)
Chief Executive Officer, North America and Brazil
Based: US
Experience:
Pascal leads Sage’s business in the USA, Canada and Brazil. From 1997
to April 2011 he was CEO of Sage France, where he was also responsible
for Belgium, Brazil, Switzerland and Morocco. Pascal joined Sage France
in 1989 and went on to become Regional Director and Sales Director,
before leading the Sybel business after it was acquired by Sage in 1995.
Starting his career as a systems analyst for UAP Insurance, Pascal
co-founded Sinequanon in 1987, providing business management
solutions to SMEs. He was also Vice President of Syntec, the French
software and IT association, for nine years.
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Alvaro Ramirez (53)
Chief Executive Officer, Europe
Based: Spain
Experience:
Since January 2011 Alvaro has been responsible for Sage’s European
strategy, operations and business performance. Previously, as CEO of
Sage Spain, he grew the Spanish business both organically and through
acquisition, transforming it into a market-leading software company.
Alvaro joined Sage in 2003 after Sage acquired Grupo SP, which he
co-founded in 1989. He grew Grupo SP to become Spain’s leader for
entry-level business management software, with subsidiaries in Portugal
and across Central and South America.
Michael Robinson (53)
Company Secretary and Group Legal Director
Based: UK
Experience:
Michael joined Sage in 2002 as Company Secretary and Group Legal
Director. After reading Law at Oxford, Michael qualified as a solicitor
and spent 15 years at one of the UK’s largest law firms.
Klaus-Michael Vogelberg (49)
Chief Technology Officer
Based: UK
Experience:
Responsible for Sage’s global technology strategy and software
architecture, Klaus-Michael is also Acting Chief Technology Officer for
Sage Europe. From 2004 to 2007 he was R&D Director for Sage UK
& Ireland. Klaus-Michael joined us when Sage acquired the German
KHK Software group in 1997, where he was R&D Director and a partner.
A software entrepreneur, Klaus-Michael set up his first business aged
19 while studying aeronautical engineering and national economics.
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Corporate governance report
Our Governance framework
The role of the Board and its committees
Board
Strategy development, growing shareholder value, oversight and control, and corporate governance
Our Board provides leadership to the business as a whole to drive it forward for the benefit, and having regard to the views, of its shareholders
and other stakeholders.
The Board is responsible for ensuring that an effective internal framework of systems and controls is put in place which clearly defines authority
and accountability and promotes success whilst permitting the management of risk to an appropriate level.
The Board sets the strategy for the business. It has delegated the authority to manage the business to Stephen Kelly, Chief Executive Officer,
who delegates specific responsibilities to members of the Executive Committee, including the development and implementation of strategy.
The Board also delegates other matters to Board committees and management as appropriate.
Audit Committee
Nomination Committee
Remuneration
Committee
Chief Executive Officer
To oversee the Group’s
financial reporting, risk
management and internal
control procedures and the
work of its internal and
external auditors.
To review the composition
of the Board and plan for its
progressive refreshing with
regard to balance and
structure as well as
succession planning.
To determine the framework,
policy and levels of
remuneration and make
recommendations to the
Board on the remuneration
of the Chief Executive Officer,
Chairman, executive directors,
the Company Secretary
and senior executives.
Executive Committee
Developing and implementing
strategy, operational plans,
budgets, policies and
procedures; monitoring
operating and financial
performance; assessing and
controlling risks; prioritising
and allocating resources; and
monitoring competitive forces
in each area of operation.
Page 71
Page 76
Page 77
The terms of reference of each
committee, which are reviewed
on an annual basis, can be
found on our website.
The Board and each committee
are satisfied that they receive
sufficient, reliable and timely
information in advance of meetings
and are provided with all necessary
resources and expertise to enable
them to fulfil their responsibilities
and undertake their duties in
an effective manner.
Board and Committee meetings and attendance
Board
7/7
7/7
–
5/5
7/7
5/5
6/7
6/7
3/3
1/1
1/1
Audit
Committee
–
–
–
–
5/5
4/4
5/5
5/5
3/3
1/1
1/1
Nomination
Committee
5/5
–
–
–
5/5
5/5
5/5
5/5
4/4
–
–
Remuneration
Committee
7/7
–
–
–
7/7
5/5
7/7
7/7
4/4
2/2
2/2
Director
Donald Brydon
Guy Berruyer1
Stephen Kelly2
Steve Hare3
Ruth Markland
Drummond Hall4
Jonathan Howell
Neil Berkett
Inna Kuznetsova5
Mark Rolfe6
Ian Mason7
Notes:
1 Retired from the Board on 5 November 2014.
2 Joined the Board on 5 November 2014.
3 Joined the Board on 3 January 2014.
4 Joined the Board on 1 January 2014.
5 Joined the Board on 6 March 2014.
6 Retired from the Board on 30 November 2013.
7 Retired from the Board on 30 November 2013.
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Board roles
Chairman
Responsible for leading
the Board, its effectiveness
and governance
The Chairman is responsible for leading the Board, its effectiveness and governance and for monitoring
and measuring the implementation of strategy. The role of Chairman also carries a particular responsibility
to monitor and assess Sage’s corporate governance practices.
To ensure a proper dialogue with directors, the Chairman holds meetings with the non-executive directors
without the executive directors to assess their views. In addition, the non-executive directors have met
without the Chairman present to appraise the Chairman’s performance. These meetings without the
Chairman are chaired by the Senior Independent Director.
The Chairman also ensures that shareholder engagement is discussed at each meeting of the Board and
that all shareholders have access to the non-executive directors, through a request to the Chairman or the
Company Secretary.
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Chief Executive Officer
Responsible for the
formulation of strategy
and running of the Group
The responsibilities of the Chief Executive Officer include:
– the design, development and agreement of strategy with the Board
– implementation of the strategy and policy and the running of the Group
– managing the overall performance of Sage, concentrating on revenue and profitability as well as
capital expenditure
The Chief Executive Officer also identifies acquisitions and monitors competitive forces, as well as ensuring
an effective and motivated leadership team.
The Chief Executive Officer chairs the Executive Committee and maintains a close working relationship with
the Chairman.
Senior Independent
Director
Discusses any concerns
with shareholders
that cannot be
resolved through
the normal channels
of communication
The role of Senior Independent Director is:
– To provide a point of contact for those shareholders who wish to raise issues with the Board, other
than through the Chairman
– Together with the other independent non-executive directors, to evaluate the performance of
the Chairman
The Senior Independent Director is available to consult with shareholders.
Company Secretary
Ensures good information
flows to the Board and its
committees and between
senior management and
non-executive directors
The Company Secretary is available to all directors to provide advice and assistance, and is responsible
for providing governance advice to the Board.
The Company Secretary ensures Board procedures are complied with, that applicable rules and regulations
are followed and acts as secretary to the Board and all of the committees. Minutes of all meetings are
circulated to all directors. He facilitates the induction of new directors and assists with professional
development as required.
The appointment and removal of the Company Secretary is a matter for the Board as a whole.
The roles of the Chairman and the Chief Executive Officer are quite distinct from one another and are clearly defined in written terms of reference for
each role. These terms of reference are available on our website.
The Sage Group plc | Annual Report & Accounts 2014
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Corporate governance report continued
Focus of the Board for the year
In the year under review, the Board’s focus has been on strategy and
ensuring that the structures, capabilities and reports are in place to
support the Group strategy. The Board has received regular reports
from both the Chief Executive Officer and the Chief Financial Officer.
In particular, in response to continued external changes discussed in
the Strategic report, time has been spent considering:
– The move to cloud solutions and to a subscription-based customer
relationship, including consideration and review of competitor
activity in these areas
– The Payments businesses and external factors impacting
their future
Actions taken to minimise the major risks faced by Sage, as described
on pages 40 to 43, have also been regularly discussed and the Board has
looked at succession issues, particularly in light of recent and ongoing
changes within our executive teams.
The Board has formally adopted a schedule of matters reserved to it
for decision. This schedule is reviewed on an annual basis, was last
reviewed on 25 September 2014 and is available via our website.
The Board meets not less than six times per year. During this year, it met
seven times.
Board composition
The Board is made up of the Chairman, Chief Executive Officer, Chief
Financial Officer and five independent non-executive directors. In order to
evolve and develop not just our Board, but also our business, a number
of changes were made to the Board during the year.The directors have
a range of experience and can bring independent judgement to bear on
issues of strategy, performance, resources and standards of conduct.
This experience and judgement is considered vital to our success. It is
the balance of skills, experience, independence and knowledge of those
directors which ensures the duties and responsibilities of the Board and
its committees are discharged effectively.
The Board carefully monitors the independence of its non-executive
directors, particularly those who have given long service. Having reviewed
the current Board, the non-executive directors are all considered to be
independent. Donald Brydon was considered independent at the date
of his appointment.
All directors are subject to election or re-election by shareholders at each
Annual General Meeting.
Diversity
The Board has due regard for the benefits of diversity in its membership,
and strives to maintain the right diversity balance. The Chairman seeks
to ensure that the composition of the Board includes individuals with
deep knowledge and experience, bringing a wide range of perspectives
to the business.
Sage continues to support the aims and objectives of The Davies Report
on Women on Boards. The Board, as at the date of this Annual Report
& Accounts, comprises 25% women (2013: 14%). The Board must
continue to provide strong leadership at Sage, and, therefore, continues
to appoint only the most appropriate candidates to the Board.
Whilst applying this policy in the Group, no measurable objectives have
been set. Further details of our policies in this area are set out on page 54.
Tenure
Gender
Executive/Non-executive
0–2 years
3–6 years
7–9 years
Male
Female
Executive
Non-executive
2014
75%
12.5%
12.5%
2014
75%
25%
2014
25%
75%
Conflicts of interest
The Board operates a policy to identify and, where appropriate, manage
conflicts or potential conflicts of interest. At each Board meeting, the
Board considers a register of interests and potential conflicts of directors
and gives, when appropriate, any necessary approvals. There are
safeguards which will apply when directors decide whether to authorise a
conflict or potential conflict, with only those directors who have no interest
in the matter taking the decision. No conflicts of interest have been
identified during the year.
Board effectiveness
The Board has adopted a written set of objectives for the financial year,
against which it assesses progress at each meeting. This ensures that the
Board focuses on key issues relevant to Sage and can monitor progress
in all these areas.
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Board and committee papers which are clear, focused and relevant
ensure that the Board has the information it needs to consider the issues
relevant to the business. The papers are issued on a timely basis to
ensure that the Board and its committees have ample time to consider
and digest their contents and that the Board has the information it needs
to discharge its duties. Regular attendance at Board meetings by key
executives ensures that the Board has the opportunity to discuss the risks
and opportunities within our business with leaders from across the Group.
Performance evaluation
The Board recognises the importance of reviewing its practices and
performance on a regular basis and has evaluated its performance
and that of its committees and individual members. In the past,
the Board evaluated its performance in a number of different ways
including detailed questionnaires and discussions between individual
directors and the Chairman. In this financial year, the Board used
an independent third party, Dr Rob Goffee, Emeritus Professor of
Organisational Behaviour at the London Business School, to undertake
the review. Dr Goffee has no other connection with Sage. Each director
completed a detailed questionnaire relating to the Board, its role and
the interaction of its members. This questionnaire was then used as
the basis for individual interviews with each director.
The results and outcomes of the review were discussed by the Board
as a whole, both with and without Dr Goffee present. Key topics during
these discussions included board composition, diversity including gender
diversity, the pattern of Board meetings, risk, shareholder engagement
and succession. As a result, new Board objectives have been set, taking
into account the findings from the review. In addition to the Board
review, the Chairman’s performance was evaluated by the Senior
Independent Director through correspondence and discussion with
the Chairman and the other independent non-executive directors
and was found to be effective, having regard to his continued time
commitment to his role.
“This three step process – questionnaire,
interview and board discussions – has allowed
a full review of Board capabilities, operation
and governance. Content and process issues
have been addressed both for the Board
and its individual members.”
— Dr Rob Goffee, Emeritus Professor of Organisational
Behaviour at the London Business School
Induction and professional development
To ensure a full understanding of Sage is developed, new Board
members undergo a full, formal and tailored induction programme.
During the year, Drummond Hall and Inna Kuznetsova received such
an induction, which included:
– A full day meeting a team of our senior executives at a Group
and operating company level
– Visits to our business in the US and meetings with the heads of
the European business
– Bespoke training as deemed necessary based on individual needs
To assist the Board in undertaking its responsibilities, training is available
to all directors and training needs are assessed as part of the Board
evaluation procedure. All directors have access to the advice and services
of the Company Secretary who ensures that directors take independent
professional advice when it is judged necessary in order to discharge
their responsibilities as directors.
Board meetings are held at our operating companies both inside and
outside the UK. Non-executive directors also visit our overseas operations
on a regular basis. This provides the Board and individual non-executive
directors with the opportunity to broaden their understanding of Sage
and the key markets in which we operate.
Risk management and internal controls
The system of internal controls and risk management is designed to
meet our particular needs and to address the risks to which our business
is exposed. By its nature, this system can only provide reasonable,
not absolute, assurance against material misstatement or loss and it is
designed to manage rather than eliminate the risk of failure to achieve
business objectives.
The Board is responsible for the Group’s system of internal controls.
The effectiveness of the system of internal controls and risk management
is regularly reviewed by the Board, in compliance with the UK Corporate
Governance Code, and such a review was undertaken during the year.
Risk management
There is an ongoing process to identify, evaluate and manage our
significant risks, as set out on pages 40 to 43. This process is considered
to be an integral part of the internal controls environment and is managed
on a day-to-day basis by the Group Risk and Assurance Director. This
process was in place for the year under review and up to the date of the
approval of the report.
The risk management process is set to ensure risks are identified from a
top down/strategic perspective as well as a bottom up/local perspective.
Facilitated risk workshops are undertaken with the Executive Committee
and at each of the major territories within the Group. Results from risk
management activities are reported to and discussed directly with the
Executive Committee, the Audit Committee and the Board.
Internal controls
Financial reporting
As part of the internal controls processes, we have specific procedures
and systems to govern financial reporting. The requirements for
presenting financial information are governed by the Group Accounting
Manual, against which the external auditors review the financial
statements. Financial control requirements are set out in a Financial
Controls Policy, which is subject to annual internal audit reviews. Any
part of the Group not subjected to an internal audit review of financial
controls in any given year is required to self-assess and self-certify on
the effectiveness of their financial control environment.
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Risk management and internal controls continued
Whistleblowing
A whistleblowing telephone hotline service operates in most of our
operating companies, allowing employees to raise concerns in relation
to dishonesty or malpractice on an entirely confidential basis. The
Audit Committee receives regular reports on any matters raised through
these services and monitors the use throughout the Group.
Quality and integrity of personnel
The integrity and competence of personnel is ensured through high
recruitment standards and the provision of subsequent training and
development. High quality personnel are seen as an essential part
of the control environment.
Management structure
A clearly defined organisational structure exists within which individual
responsibilities are identified and can be monitored. The management
of the Group as a whole is delegated to the Chief Executive Officer and
the Executive Committee, as discussed on page 66. Within the Group
team there are a number of central administrative functions such as
Group Treasury, Corporate Communications and Group Legal. These
functions report to the Board through its executive members and the
members of the Executive Committee.
A number of Group-wide policies, issued and administered centrally,
have been set to ensure compliance with key governance standards.
These policies cover areas such as finance, data protection and
mergers and acquisitions.
The conduct of Sage’s individual businesses is delegated to the local
executive management teams. Details of the authority delegated to local
and regional management are set out in a delegation of authority matrix
which is communicated to management throughout Sage. These teams
are accountable for the conduct and performance of their businesses
within the agreed business strategy. They have full authority to act subject
to the reserved powers and sanctioning limits laid down by the Board
and to Group policies and guidelines.
Budgetary process
A comprehensive budgeting system is in place, with annual budgets
for all operating companies being approved by respective local boards.
Subsequently the combined budget is subject to consideration and
approval by the Board. Management information systems provide
the directors with relevant and timely information required to monitor
financial performance.
Investment appraisal (including acquisitions)
Budgetary approval and defined authorisation levels regulate capital
expenditure. As part of the budgetary process the Board considers
proposals for research and development programmes. Acquisition
activity is subject to internal guidelines governing investment
appraisal criteria, financial targets, negotiation, execution and
post-acquisition management.
Monitoring and review
There are processes in place to monitor the system of internal controls
and to report any significant control failings or weaknesses and planned
mitigating actions. These processes include:
– On an ongoing basis, the Sage operating companies certify that
Sage’s policy requirements have been received and understood
– Management representations covering compliance with relevant
policies and the accuracy of financial information are collated on
an annual basis
Internal audit
Internal audit activities are provided by an in-house team supplemented
under co-source agreements by third-party providers. The role of Head
of Internal Audit is undertaken by the Group Risk and Assurance Director
who has a direct reporting line to the Audit Committee and its Chair in
order to ensure independence.
Internal audit’s role is to advise management and the Board on the extent
to which systems of risk management and internal controls are effective.
The internal audit plan is determined through a structured process of risk
assessment and the scope of work provides assurance over both key
risks and our main business functions.
The internal audit plan is flexed as necessary during the year to take into
account any key business changes. During this year, key areas reviewed,
over and above financial, HR and IT controls, were the provision of online
services, information security, storage of source code and compliance
with external regulatory and internal policy requirements. The full plan was
delivered during the year and the results were in line with expectations.
Relations with shareholders
Communication with shareholders is given high priority. A full Annual
Report & Accounts is sent to all shareholders who wish to receive one
and all information on Sage’s activities, published financial results and
the Annual Report & Accounts can be found on our website. There is
regular dialogue with individual institutional shareholders and there are
presentations to analysts after our announcement of the year-end and
half-year results.
At each meeting, the Board receives an update on presentations to
investors and communications from shareholders to ensure that the
Board has an understanding of their views. The Annual General Meeting
is used to communicate with private and institutional investors and the
Board welcomes their participation.
Information included in the Directors’ report
Certain information, fulfilling certain requirements of the Corporate
Governance Statement, can be found in the Directors’ report and is
incorporated into this Corporate governance section by reference.
For reference, relevant sections of the Director’s report are:
– Substantial shareholdings
– Deadlines for voting rights
– Repurchase of shares
– Amendment of the Company’s articles of association
– Appointment and replacement of directors
– Powers of the directors
By order of the Board
M J Robinson, Company Secretary
3 December 2014
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Audit Committee
Audit Committee Membership:
– Jonathan Howell – Chair
– Neil Berkett
– Drummond Hall
– Inna Kuznetsova
– Ruth Markland
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“Our work continued to focus on the
appropriateness of the Group’s financial
reporting, the rigour of external and
internal audit processes, the Group’s
management of risk and its systems
of internal control. We also conducted
a tender for the Group’s statutory
audit which resulted in the proposal to
shareholders to confirm the appointment
of Ernst & Young LLP as Group auditors
for the 2015 financial year. We provide
more detail on these activities on the
next pages.”
Key objective
To oversee Sage’s financial reporting, risk management and internal
control procedures and the work of its internal and external auditors.
Committee meetings
All members of the Committee attend each meeting. In addition, meetings
are usually attended by the Chairman, the Chief Executive Officer, the
Chief Financial Officer, the Company Secretary, the Director of Finance
and the Group Risk and Assurance Director. Other senior executives
attend as required to provide information on matters being discussed
which fall into their area of responsibility. The external auditors also
attend each meeting. During the year, the Committee meets individually
with the external auditors without executives present, the Chief Financial
Officer and the Group Risk and Assurance Director. During the year, the
Committee met five times – four in accordance with its terms of reference
and an additional meeting on the external audit tender.
Relevant financial experience
Jonathan Howell is Chair of the Audit Committee and, as a member
of the Institute of Chartered Accountants in England and Wales and
the Chief Financial Officer of a FTSE 250 company, is considered by
the Board to have the recent and relevant experience required by the
UK Corporate Governance Code 2012. All the other members of the
Committee are independent non-executive directors who have a wide
range of relevant business experience.
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Corporate governance report continued
Audit Committee continued
Responsibility
To review and advise the Board on:
The interim and annual financial statements, the accounting
policies used and on the significant issues in relation to the
financial statements
Whether the Annual Report & Accounts taken as a whole is
fair, balanced and understandable
The effectiveness of the internal control environment and risk
management procedures, including whistleblowing procedures
The nature and extent of significant financial and business risks
to Sage and the mitigation of these risks
In addition, the Committee is responsible for:
Reviewing and approving the nature and scope of external and
internal audit work, the results of that work and management’s
related responses
Setting and monitoring compliance with the policy on
non-audit services
Ensuring the external auditors are effective and independent
Making recommendations to the Board on external auditors’
remuneration and appointment
Activity in the year
The Committee reviewed the interim and annual financial statements
and reported to the Board on the appropriateness of the accounting
policies and practices adopted. As part of this review, the Committee
considered the significant issues in relation to the financial statements
and received reports from the Group finance team and the external
auditors on the Annual Report & Accounts
The Committee reviewed the results of processes put in place to
provide assurance on this aspect. The processes included the review
and assessment of the Annual Report & Accounts by management
and internal and external audit
The Committee considered reports produced by the Risk and
Assurance team during the year and at the year-end as set out
on page 74
The Committee received and discussed detailed Group risk update
reports during the year. In addition, the Committee allowed time for
in-depth reviews of particular risk and finance areas. During the year,
these areas considered included IT and data security, the future
development of the finance function across the Group and risks
specific to our Payments businesses
The Committee considered and approved the planned activities of
internal audit along with the scope of the external audit for the year.
Regular reports were received from internal and external audit and
discussed by the Committee
The policy on non-audit services was updated and approved by the
Committee during the period. Compliance with the new policy was
confirmed during the year
The Committee considered the independence of the external auditors
and the effectiveness of the external audit process as set out on
page 75
The Committee conducted a formal tender process during the
2014 financial year with details of the process undertaken and
the recommendations made provided on page 75
Financial reporting
The Committee reviewed and considered the following areas in respect of financial reporting and the preparation of the interim and annual
financial statements:
– The appropriateness of accounting policies and practices
– Compliance with external financial reporting standards and relevant statutory requirements
– Significant judgements made, as set out in more detail below
– Disclosure and presentation in the financial statements
– Whether the Annual Report & Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary
for shareholders to assess Sage’s performance, business model and strategy
The Committee considered the work, judgements and conclusions of the Group finance team and received reports from the external auditors setting
out their view on the accounting treatments included in the financial statements. The external auditors’ reports are based on a full audit of the annual
financial statements and a review of the interim financial statements.
Processes are in place to ensure that assurance can be provided on whether the Annual Report & Accounts is considered to be fair, balanced
and understandable. The Committee receives drafts and working papers relating to the Annual Report & Accounts in order to facilitate its review and
input. Management representations, external and internal audit reviews have also taken place to provide this assurance to the Audit Committee and
the Board.
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Significant issues
The significant issues considered by the Committee were as follows:
Matter considered
Revenue recognition
Action
The key area of judgement and complexity is the timing
of revenue recognition, particularly in relation to the
recognition and deferral of revenue on maintenance
and support contracts, for instance, where products
are bundled
Goodwill impairment testing
Goodwill is an area of focus for the Committee given
the materiality of the Group’s goodwill balances and
the evolution of Sage’s business model as it continues
to execute its strategy. The judgements in relation to
goodwill largely relate to the assumptions applied in
calculating the value in use of the Cash Generating Units
(“CGUs”) and the ongoing appropriateness of the CGUs
being used for the purpose of impairment testing
Archer litigation
The claim for damages made by Archer Capital in relation
to the potential purchase of MYOB, which continues to
be strongly rejected by management, continued to be
considered in the current year
Tax provisions
The Group recognises certain provisions and accruals in
respect of tax which involves a degree of estimation and
uncertainty for certain items whose tax treatment cannot
be finally determined until a resolution has been reached
with the relevant tax authority
– The Committee considered a revenue recognition paper prepared by
management which set out the basis of the implementation of the accounting
policies and practices in this area. It also confirmed that no changes to the fair
value allocation methodology had been made in the current year. The paper
also incorporated the benchmarking of accounting policy application by each
operating unit
– Revenue recognition is an area of focus for PricewaterhouseCoopers
who performed detailed audit procedures and reported on their work
to the Committee
– The Committee reviewed and considered a detailed report from management
on the work undertaken and the assessments made in relation to the
impairment testing of goodwill. The report considered the determination
of CGUs, the future performance expectations of the businesses concerned
and the discount rates applied to future cash flow forecasts
– The Committee also reviewed the assumptions underpinning the impairment
of the goodwill relating to the business in Brazil. The Audit Committee reviewed
and challenged the sensitivity analysis including the macroeconomic
environment and cost of capital assumptions used
– This was an area of focus for PricewaterhouseCoopers, who reported
their findings and assessment to the Committee
– The Committee received a report from management on the status
of the litigation and an update from the Group Legal Director on any
new or relevant legal considerations
– PricewaterhouseCoopers discussed the matter with management,
the Group Legal Director, and external legal counsel and reported
their findings and assessment to the Committee
– The Committee received a report from management detailing the key risks
against which provisions had been made and the methodologies used to
determine the appropriate level of each provision based on advice from
our external tax advisors
– This was also an area of focus for PricewaterhouseCoopers, who reported
on their work and assessment to the Committee
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Taxation
The Committee received a report during the year from the Group Tax
Director on the Group’s tax policy, approach to tax management and
status of compliance. Any tax issues requiring significant judgement were
presented to, and reviewed by, the Board or a designated committee.
Internal audit
The Committee monitored and reviewed the scope and results of internal
audit’s activities including the quality and timeliness of management
responses. The annual internal audit plan is approved by the Committee
at the beginning of the financial year, with any subsequent changes to the
plan requiring Committee approval. Progress against the plan is monitored
throughout the year. Significant issues identified within audit reports are
considered in detail by the Committee along with the appropriateness of
mitigation plans to resolve those issues.
An internal audit charter is in place which outlines the objectives,
authority, scope and responsibilities of internal audit. Performance
against this charter, and the effectiveness of internal audit, is reviewed
by the Committee on an annual basis.
The Committee also considers and evaluates the level of internal
audit resource to ensure it is appropriate to provide the required level
of assurance over the key risks, processes and controls throughout
the Group.
Corporate governance report continued
Audit Committee continued
Risk management and internal controls
The Group has a clear organisational structure for the control and
monitoring of its business. The Committee reviews the framework
of internal controls and the processes by which the Group’s control
environment is evaluated, the effectiveness of the internal controls
environment and risk management procedures, including
whistleblowing procedures.
In this regard, the Committee received reports from internal audit on
the operation of, and issues arising from, the Group’s internal controls
and procedures. External audit has also provided input and observations
on the internal control environment.
Risk management
The Committee reviews the Group’s risk management framework in
order to ensure it is appropriate and operating effectively. In doing so,
the Committee received reports from the Group Risk and Assurance
Director, covering:
– Risk appetite
– The effectiveness of the risk management processes and their
adoption across the Group
– A summary of the most critical risks to the Group, controls identified
to mitigate these risks and actions planned to reduce risks where
considered necessary
The Board has an ongoing process to identify, evaluate and manage the
significant risks faced by the Group, details of which can be found on
pages 40 to 43.
As part of its agenda, the Committee allowed time for in-depth reviews
of particular risk areas. During the year, the risk areas considered were
IT and data security, the future development of the finance function and
risks specific to our Payments businesses.
Whistleblowing and incident reports
The Audit Committee receives regular reports on any matters reported
through the whistleblowing process.
The Group operates whistleblowing telephone hotline services in many
of its operating companies, including those in the UK and US which,
together with confidential reporting systems in other operating companies,
allow employees to report matters of concern on a confidential basis.
In reviewing whistleblowing, fraud and incident reports, the Committee
assesses the cause of the particular incidents, along with actions
taken to resolve and prevent recurrence. The Committee also reviewed
compliance activities in relation to the Group’s policies and received
a report on the status of compliance with these policies.
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External audit
The Committee reviews and makes recommendations with regard to
the appointment of the external auditors. In making this recommendation,
the Committee considers auditor effectiveness and independence,
partner rotation and any other factors which may impact the external
auditors’ reappointment.
Independence and the provision of non-audit services
In order to ensure the independence of the external auditors, the
Committee received a formal statement of independence from the
external auditors. In addition, the Committee ensured compliance
with Sage’s Auditor Independence Policy, the principal requirements
of which are:
Competitive tender process
During the year the Committee conducted a formal tender for the
proposed appointment of a new external audit firm for the 2015 financial
year. The Committee appointed a selection panel to undertake much of
the detailed work and invited three of the Big Four firms to tender.
PricewaterhouseCoopers LLP had been external auditors since 1988
and no formal tender process had taken place since that appointment.
Therefore, by mutual agreement, it was agreed that they would not be
invited to participate in the tender process.
In the process, the tendering firms met with senior finance management
across the Group and submitted detailed written proposals before
presenting to the selection panel. The selection panel and Committee
assessed the firms against key criteria and recommended to the
Board that Ernst & Young LLP be appointed as auditors to Sage for
the financial year ending 30 September 2015. The criteria used to reach
this decision included:
– The quality of the central team
– Commitment to sharing ideas and insights on best practice
developments in accounting and reporting
– Capability to provide comprehensive and high quality
audit services
– Approach to ensuring a smooth transition process
– Approach to tender process
– Independence and quality of the team
Accordingly, a resolution proposing the appointment of Ernst & Young
LLP as our auditor will be put to shareholders at the AGM in March 2015.
Effectiveness of the external audit process
The Committee also monitored the conduct and effectiveness of external
audit during the year through review of:
– The external auditors may not undertake certain prohibited services,
which include taxation compliance and planning, acquisition due
diligence, internal audit services, remuneration and compensation
services and legal and actuarial advice
– The Committee must approve any individual non-audit services
above a specific fee value
– The ratio of audit fees to non-audit fees must be within Sage’s
pre-determined ratio, which is currently 70% of the average of the
external audit fees billed over the previous three years
This policy was updated during 2014 to take into account recent
changes in EU regulation. The implementation of the policy was
effective from the beginning of the 2015 financial year.
The Committee believes that it receives particular benefit from certain
non-audit services provided by the external auditors due to their wide
and detailed knowledge of Sage. Discretion is therefore used, subject
to the controls set out above, in obtaining such services from the
external auditors, although other accountancy firms are also used
when appropriate. During the year, non-audit services obtained from
the external auditors included tax compliance (prior to the updating
of the Auditor Independence Policy) and advice and support relating
to corporate restructuring.
The total audit fees charged by the auditors during the year were £2.1m
and the amount of non-audit fees was £1.0m. The ratio of non-audit fees
for the year to the average of the external audit fees over the previous
three years was 48%. A breakdown of total audit and non-audit fees
charged by the auditors for the year under review is shown in note
3.2 to the financial statements.
Jonathan Howell
Chairman of the Audit Committee
– Experience and expertise of the auditors
3 December 2014
– The fulfilment of the agreed audit plan and any variations from
this plan
– The robustness and perceptiveness of the external auditors
in their handling of key accounting and audit judgements
– Interaction between management and the auditors, including the
dedication of sufficient time by management to the audit process
– Communication with, and support to, the Committee
– Insights, added value and reports
– The content of the external auditors’ report
– Independence, objectivity and scepticism
Private meetings were held with the external auditors at two of the
Audit Committee meetings to provide additional opportunity for open
dialogue and feedback from the Committee and the auditors without
management being present.
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Corporate governance report continued
Nomination Committee
Nomination Committee Membership:
– Donald Brydon – Chair
– Jonathan Howell
– Neil Berkett
– Drummond Hall
– Inna Kuznetsova
– Ruth Markland
“This year saw changes in both executives
and non-executives. The Committee
ran a robust and wide-ranging process,
resulting in key appointments to
strengthen the Board’s existing skills.”
Key objective
To review the composition of the Board and to plan for its progressive
refreshing, with regard to balance and structure. The Committee also
considers issues of succession.
Committee meetings
The Committee is required, in accordance with its terms of reference,
to meet at least once per year. During the year, the Committee met
five times.
Responsibility
Activity in the year
Reviewing the structure of the Board
The Committee dealt with the appointment of a new Chief Executive Officer and the appointment
of two non-executive directors, with further detail provided below on the process undertaken
Evaluating the balance of skills,
knowledge, experience and
diversity of the Board
The Committee considered the skills, knowledge, independence and experience of the Board and
reaffirmed the approach to diversity, as described on page 54
Advising the Board on areas where
further recruitment may be appropriate
The Committee considered the skills and experience of the Board members, resulting in
new appointments to non-executive roles. It continues this review on an ongoing basis
Succession planning for key
executives at Board level and below
Whilst there have been several Board appointments during the current year, the Committee
has continued to work to ensure appropriate succession and mix amongst both the executive
and non-executive directors, as shown on page 53
Board appointments
In identifying a new Chief Executive Officer, the Committee retained the
services of executive search consultants, Egon Zehnder. Egon
Zehnder worked closely with the Chairman who led the process
on behalf of the Committee.
Drummond Hall’s wealth of experience in large, listed companies and
knowledge of marketing issues within those companies were seen by
the Committee as of particular interest. Inna Kuznetsova’s international
experience and knowledge of the technology industry made her
an exceptional candidate in the view of the Committee.
A number of potential candidates were identified by the consultants and
some candidates approached Sage directly. An initial long list of possible
appointees was discussed with the Chairman, from which a shortened
list was created. All candidates on the shortened list were interviewed
by Committee members. Following the interviews and fully considering
the experience and skills of the candidates, as well as the diversity of
the Board, the Committee unanimously recommended the appointment
of Stephen Kelly as Chief Executive Officer to the Board.
The Zygos Partnership and Egon Zehnder have no connection with Sage
or the appointed directors other than for the provision of these services.
As described in our report for the previous financial year, in identifying a
potential new Chief Financial Officer, the Committee retained the services
of Russell Reynolds as search consultants. The search resulted in the
appointment of Steve Hare as Chief Financial Officer. Russell Reynolds
have no connection with Sage or the appointed directors other than for
the provision of these services.
In identifying new non-executive directors, the Committee retained
the services of The Zygos Partnership and Egon Zehnder as search
consultants. Taking into account the diversity of the Board, a number
of potential candidates were identified who all met the Committee.
Donald Brydon
Chairman of the Nomination Committee
3 December 2014
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Directors’ remuneration report
Remuneration Committee Membership:
– Ruth Markland – Chair
– Donald Brydon
– Jonathan Howell
– Neil Berkett
– Drummond Hall
– Inna Kuznetsova
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“We align our performance measures
to our strategy and continue to reinforce
alignment with our shareholders through
the application of our remuneration policy.”
Key objective
To determine the framework, broad policy, and levels of remuneration for
the Group’s Chief Executive Officer (“CEO”), the Group’s Chief Financial
Officer (“CFO”), the Chairman of the Company and other executives
as deemed appropriate. This framework includes, but is not limited to,
establishing stretching performance-related elements of reward and is
intended to promote the long-term success of the Company.
Committee meetings
No one other than a member of the Committee is entitled to be present
at its meetings. The CEO may, as required, attend meetings, except
where his own performance or remuneration is discussed. No director
is involved in deciding his or her own remuneration.
The Committee is required, in accordance with its terms of reference, to
meet at least four times per year. During this financial year, the Committee
met seven times.
Key Responsibilities
Making recommendations to the Board, within agreed terms of reference, on Sage’s framework of executive remuneration
Determining the contract terms, remuneration and other benefits for each of the executive directors, including performance share awards,
performance-related bonus schemes, pension rights and compensation payments
Monitoring remuneration for senior executives below Board level
Approval of share awards
Dear fellow shareholder,
It is my pleasure to present the Directors’ remuneration report for the
year ended 30 September 2014.
We aim to be entirely transparent in our remuneration practices and
provide shareholders with the information needed to make informed
decisions about our Company. We have sought to develop our
disclosure further in this year’s report and hope that you find this useful.
Our remuneration principles for executive directors
and the Executive Committee
Our remuneration principles, which our detailed policy supports,
are as follows:
– We offer competitive and fair rates of pay and benefits to attract and
retain the best people
– We aim to create a strong performance-oriented environment and
reward achievement of our Company strategy and business
objectives
– Pay and employment conditions elsewhere in the Group are
considered when determining executive base and bonus reviews
– The interests of our senior management team are aligned with those
of shareholders by having a significant proportion of remuneration
performance-based and delivered through shares
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Remuneration policy
Our remuneration policy remains unchanged from last year, having
been approved at the 2014 Annual General Meeting. We operate a
remuneration structure made up of base salary and benefits, a bonus
plan and a long-term incentive plan, which provides a clear link between
pay and our key strategic priorities.
Our remuneration policy is guided by a common reward framework.
Reward policies
Attract and retain. Remuneration packages are designed to attract
high-calibre executives in a competitive international market which
includes private-equity backed organisations as well as listed companies,
and to remunerate executives fairly and responsibly.
Motivate and reward. Remuneration is designed to motivate delivery
of our key business strategies, create a strong performance-orientated
environment and reward achievement of meaningful targets over the
short and long term.
Reward principles
Alignment with the wider Group. The remuneration policy for
executives reflects the overriding remuneration philosophy and principles
of the wider Group considering pay and employment conditions
elsewhere in the Group.
Stretching performance targets. The Remuneration Committee
considers that a successful remuneration policy links a significant part
of the remuneration package to the achievement of stretching corporate
performance targets and a strong alignment of interest with shareholders.
We believe that the policy as a whole is well aligned to the current
business strategy and the outcome reflects business performance.
Activities of the Remuneration Committee (“the Committee”)
The main activities of the Committee since the last report were as follows:
– Reviewed the performance of the Group for the year, and the
performance of the executive directors in order to determine
bonus outcomes
– Approved share awards for 2014
– Confirmed the overall package including a one-off share award
for the incoming CEO
– Agreed the remuneration arrangements for the outgoing CEO
– Set base salaries and established the executive directors’ bonus
arrangements for 2015
– Reviewed the Directors’ remuneration report
– Considered remuneration market trends and corporate
governance developments
– Approved the base salaries for 2015 and the 2014 bonuses
of seven Executive Committee members
– Proposed new LTIP
Remuneration for 2014
Sage continued to deliver on its three-year strategy for accelerated
growth, with a view to doubling the long-term historic average organic
growth rate from 3% to 6% by the end of the 2015 financial year.
In summary, for the year ended 30 September 2014, Group organic
revenue growth was 5%, reflecting good acceleration in growth on
the prior year and underlying pre-tax profit was £340m. In addition,
underlying operating profit margin increased to 27.5%. Combined
with the achievement of strategic objectives, this resulted in 55% and
57% of the maximum bonus opportunity for 2014 paying out for the
CEO and CFO respectively.
Details of the remuneration decisions for 2014 are set out in the
Directors’ annual remuneration report on pages 83 to 92.
Remuneration for 2015
We are delighted that Stephen Kelly joined us as CEO from 5 November
2014. Details of his remuneration are set out on page 87. Base salaries
and bonus measures for 2015 have been established for both the new
CEO and the CFO.
Guy Berruyer will continue to be employed by the Company until 31
March 2015 although he stepped down from the role of CEO and as a
director of the Company on 5 November 2014. During his employment,
Mr Berruyer will continue to receive his normal base salary and benefits,
but will not be eligible for a bonus or housing allowance for the period
from 5 November 2014. During this period, he will be available to assist
the new CEO as required.
The revised UK Corporate Governance Code was published just
before the start of the financial year commencing on 1 October 2014.
Consequently, there was insufficient time for the Committee to consider
and set a suitable policy for the application of malus and clawback
in relation to annual incentives for the performance year starting on
1 October 2014. The Committee plans to review in detail and develop
a suitable policy for application to future performance periods.
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Performance Share Plan – key changes
The current Performance Share Plan rules expire on 15 March 2015.
The new rules will be put to shareholders for approval at the AGM.
The key changes to the plan are as follows:
Introduction of malus and clawback provisions, allowing the Committee
to exercise discretion to reduce the level of unvested awards or reclaim
(within three years of release) previously paid awards. Circumstances
where the Committee may elect to apply this discretion include a material
misstatement of the Group’s audited results or a material failure of risk
management or serious reputational damage to the Group or a business
unit as a result of the participant’s misconduct.
Committee discretion to grant awards subject to a holding period. Where
a holding period is attached to an award, the default holding period is two
years. The Committee does not intend to apply a holding period to PSP
awards granted in 2015 but will keep the application of this provision
under review for future grants.
Remuneration disclosure
This report complies with the requirements of the Large and Medium-
sized Companies and Groups Regulations 2008 as amended in 2013,
the provisions of the UK Corporate Governance Code (September 2012)
and the Listing Rules.
The report is in two sections:
– A summary of the Directors’ remuneration policy report
(pages 80 to 82). This section contains details of the remuneration
policy approved at the 2014 AGM and is for information only
– The Directors’ annual remuneration report. This section sets
out details of how our remuneration policy was implemented for the
year ended 30 September 2014 and how we intend for the policy
to apply for the year ended 30 September 2015 and is the subject
of an advisory shareholder vote
At the AGM in March 2015:
– The renewal of the Performance Share Plan will be put to a binding
shareholder vote
– The Directors’ annual remuneration report will be put to an advisory
shareholder vote
Ruth Markland
Chairman of the Remuneration Committee
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Directors’ remuneration report continued
Directors’ remuneration policy report
Summary of Directors’ remuneration policy report
The remuneration policy was approved at the AGM in March 2014. Provided for information only are details of the policy that were referenced in
Committee activities over the past reporting year which includes the Remuneration policy table, minimally updated, below, and the recruitment
remuneration arrangements, executive director service contracts and terms and conditions for non-executive directors. The full policy report,
as approved by shareholders, can be found in last year’s remuneration report, a copy of which can be found in the Investor Relations section
at www.sage.com.
Remuneration policy table
The Committee reserves the right to make any remuneration payments and payments for loss of office, notwithstanding that they are not in line with the
policy set out below, where the terms of the payment were agreed (i) before the policy came into effect or (ii) at a time when the relevant individual was
not a director of the Company and, in the opinion of the Committee, the payment was not in consideration for the individual becoming a director of the
Company. For these purposes, “payments” includes the Committee satisfying awards of variable remuneration and, in relation to an award over shares,
the terms of the payment are “agreed” at the time the award is granted.
Alignment with strategy/purpose
Base salary
Supports the recruitment and
retention of executive directors
of the calibre required to deliver
the Group’s strategy.
Rewards executives for the
performance of their role.
Set at a level that allows
fully flexible operation of our
variable pay plans.
Pension
Provide a competitive
post-retirement benefit, in
a way that manages the
overall cost to the Company.
Benefits
Provide a competitive and
cost-effective benefits package
to executives to assist them to
carry out their duties effectively.
Annual bonus
Rewards and incentivises
the achievement of annual
financial and strategic targets.
An element of compulsory
deferral until shareholding
guideline is met, providing
a link to the creation of
sustainable long-term
value creation.
Operation
Maximum opportunity
Performance measures
Normally reviewed annually, any increases
generally apply from January.
When determining base salary levels,
consideration is given to the following:
– Pay increases for other employees in major
operating businesses of the Group
– The individual’s skills and responsibilities
– Pay at companies of a similar size and
Ordinarily, salary increases will be in
line with increases awarded to other
employees in major operating
businesses of the Group.
However, increases may be made
above this level at the Committee’s
discretion to take account of individual
circumstances such as:
international scope to Sage, in particular those
within the FTSE 100 (excluding the top 30)
– Increase in scope and responsibility
– Increase to reflect the individual’s
None, although overall
performance of the individual is
considered by the Committee
when setting and reviewing
salaries annually.
– Corporate and individual performance
development and performance in role
(e.g. for a new appointment where
base salary may be increased over time
rather than set directly at the level of
the previous incumbent or market level)
– Alignment to market level
Defined contribution plan (with Company
contributions set as a percentage of base salary).
An individual may elect to receive some or all of
their pension contribution as a cash allowance.
25% of base salary for all executive
directors. No element other than
base salary is pensionable.
None.
The Group provides a range of benefits which
may include a car benefit (or cash equivalent),
private medical insurance, permanent health
insurance, life assurance and financial advice.
Additional benefits may be also be provided
in certain circumstances which may include
relocation expenses, housing allowance and
school fees. Other benefits may be offered if
considered appropriate and reasonable by
the Committee.
Set at a level which the Remuneration
Committee considers:
None.
– Appropriately positioned against
comparable roles in companies
of a similar size and complexity
in the relevant market
– Provides a sufficient level of benefit
based on the role and individual
circumstances, such as relocation
Measures and targets are set annually and
payout levels are determined by the Remuneration
Committee after the year-end based on
performance against those targets.
For maximum performance:
– 125% of salary
For on-target performance:
– 75% of salary
For threshold performance:
– 15% of salary
The Remuneration Committee may, in
exceptional circumstances, amend the bonus
payout should this not, in the view of the
Committee, reflect overall business performance
or individual contribution.
The annual bonus is delivered in cash. Executives
must defer 20% of their bonus into shares
until the shareholding guidelines have been met.
Deferred shares normally vest after three years
and may be adjusted to reflect the impact of any
variation of share capital, in accordance with the
plan rules. On the vesting of awards, executives
receive an amount (in cash or shares) equal to
the dividends paid or payable between the date
of grant and the vesting of the award on the
number of shares which have vested.
Performance is assessed using
the following metrics:
– 80% of the award is based
on financial measures
– 20% of the award is based
on strategic measures
The measures and targets
are set by the Committee
each year. The measures
that will apply for the financial
year 2015 are described
in the Directors’ annual
remuneration report.
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Alignment with strategy/purpose Operation
Performance share plan
Motivates and rewards the
achievement of long-term
business goals.
Supports the creation of
shareholder value through
the delivery of strong market
performance aligned with the
long-term business strategy.
Supports achievement of
our strategy by targeting
performance under our
key financial performance
indicators of organic revenue
growth and EPS growth.
All-employee share plans
Provides an opportunity for
directors to voluntarily invest
in the Company.
Chairman and non-
executive director fees
Provide an appropriate
reward to attract and retain
high-calibre individuals.
Non-executive directors
do not participate in any
incentive scheme.
Contingent awards of shares are made annually
with vesting dependent upon the achievement
of performance conditions over three years.
The Remuneration Committee has discretion
to decide whether and to what extent targets
have been met, and if an exceptional event
occurs that causes the Committee to consider
that the targets are no longer appropriate, the
Committee may adjust them.
Awards may also be adjusted in the event
of a variation of capital, in accordance with
the plan rules.
On the vesting of awards, executives receive an
amount (in cash or shares) equal to the dividends
paid or payable between the date of grant and
the vesting of the award on the number of shares
which have vested.
UK-based executive directors are entitled to
participate in a UK tax approved all-employee
plan, The Sage Group Savings-Related Share
Option Plan, under which they make monthly
savings over a period of three or five years linked
to the grant of an option over Sage shares with
an option price which can be at a discount of up
to 20% of the market value of shares on grant.
Options may be adjusted to reflect the impact
of any variation of share capital.
Fees are reviewed periodically.
The fee structure is as follows:
– The Chairman is paid a single, consolidated fee
– The non-executive directors are paid a basic
fee, plus additional fees for chairmanship
of Board Committees and to the Senior
Independent Director
– Fees are currently paid in cash but the
Company may choose to provide some of the
fees in shares
– The Chairman has use of a car and driver.
– Non-executive directors may be eligible to
benefits such as company car, use of secretarial
support, healthcare or other benefits that may
be appropriate
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Maximum opportunity
Awards vest on the following basis:
– Target performance: 20% of the maximum
shares awarded
– Stretch performance: 80% of the maximum
shares awarded
– Exceptional performance: 100% of the
shares awarded
– With straight-line vesting between each level
of performance
– Current annual award levels for executive
directors are 250% of base salary at the
time of grant
– Overall individual limit of 300% of base
salary under the rules of the plan
The Committee retains the discretion to
make awards up to the individual limit under
the plan and, as stated in previous
Remuneration reports, would expect to
consult with significant investors if awards
were to be made routinely above current
levels, as the Committee did prior to
increasing award levels for 2013.
Performance measures
Performance is assessed
against three independently
measured metrics which
are equally weighted:
– 1/3 organic revenue
growth with a margin
underpin
– 1/3 EPS growth
– 1/3 relative TSR
performance against
the FTSE 100 (excluding
financial services and
extracting companies)
The measures and targets
are set by the Committee.
Details of the targets that
will apply for 2015 are set
out in the Directors’ annual
remuneration report.
Participation limits are those set by the UK
tax authorities from time to time. Currently
this is £500 per month.
None.
Set at a level which:
None.
– Reflects the commitment and contribution
that is expected from the Chairman and
non-executive directors
– Is appropriately positioned against
comparable roles in companies of a
similar size and complexity in the relevant
market, particularly companies of a similar
size and international scope to Sage, in
particular those within the FTSE 100
(excluding the top 30)
The Chairman fee has been set at £360,000
and fixed at this level for five years from the
date of appointment (July 2012).
Overall fees paid to directors will remain
within the limit stated in our articles of
association, currently £1m.
Actual fee levels are disclosed in the
Directors’ annual remuneration report for
the relevant financial year.
Notes:
– Annual bonus performance measures have been selected to provide an appropriate balance between incentivising directors to meet profitability and other financial
targets for the year and achieve strategic operational objectives. The measures and targets are selected every year by the Committee.
– There are no specific provisions to withhold or recover sums paid under the current short and long-term incentives. The PSP renewal, pending shareholder approval,
will incorporate such provisions for the long-term incentives. Application to short-term incentives will be reviewed in the forthcoming year.
– While our remuneration policy follows the same principles across the Group, packages offered to employees reflect differences in market practice in the different countries
the Group operates in and also differences in size of role. Performance share plan: organic revenue growth and EPS are key measures of the success of the execution
of our long-term strategy. TSR is considered a key measure for a number of our shareholders and provides further alignment with value created for shareholders.
– All directors submit themselves for re-election annually.
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Directors’ remuneration policy report continued
Recruitment remuneration arrangements
In the event of hiring a new executive director, the Committee will seek
to align the remuneration package with our remuneration policy, which
may include the elements outlined in the policy table above. However,
the Committee retains the discretion to make appropriate remuneration
decisions outside the standard policy to meet the individual
circumstances of the recruitment. This may, for example, include the
following circumstances:
– An interim appointment is made to fill an executive director role on
a short-term basis
– Exceptional circumstances require that the Chairman or a
non-executive director takes on an executive function on a short-
term basis
– An executive director is recruited at a time in the year when it
would be inappropriate to provide a bonus or LTIP award for that
year as there would not be sufficient time to assess performance.
The quantum in respect of the months employed during the year
may be transferred to the subsequent year so that reward is
provided on a fair and appropriate basis
– An executive is recruited from a business or location that
offered some benefits that the Committee might consider
appropriate to buy out but that do not fall into the definition
of “variable remuneration forfeited” that can be included in the
buyout element under the wording of the regulations
– The executive received benefits at his previous employer which
the Committee considers it appropriate to offer
The Committee may also alter the performance measures, performance
period and vesting period of the annual bonus or long-term incentive,
subject to the rules of the plan, if the Committee determines that the
circumstances of the recruitment merit such alteration. The rationale
will be clearly explained.
In determining appropriate remuneration arrangements on hiring a new
executive director, the Committee will take into account relevant factors;
this may include the calibre of the individual, local market practice, the
existing remuneration arrangements for other executives and the business
circumstances. We seek to ensure that arrangements are in the best
interests of both Sage and its shareholders and seek not to pay more
than is appropriate.
The Committee may make awards on hiring an external candidate to buy
out remuneration arrangements forfeited on leaving a previous employer.
In doing so the Committee will take account of relevant factors including
any performance conditions attached to these awards, the form in which
they were granted (e.g. cash or shares) and the timeframe of awards. We
will generally seek to structure buyout awards on a comparable basis to
awards forfeited.
The rules of The Sage Group Performance Share Plan permit the grant
of two awards in the first year of employment; the individual limit from the
plan rules would apply to each award.
In order to facilitate the awards mentioned above, the Committee may
therefore rely on exemption 9.4.2. of the Listing Rules which allows for the
grant of awards to facilitate, in exceptional circumstances, the recruitment
of a director.
The remuneration package offered to new directors may include
buyout remuneration and other remuneration components included in
the remuneration policy (as per the policy table above), including: base
salary/fees, pension, benefits, annual bonus and long-term incentives.
The maximum level of variable pay which may be awarded to
new executive directors, excluding buy-out arrangements and awards
in the first year of employment detailed above, would normally be in line
with the maximum level of variable pay that may be awarded under the
annual bonus plan and performance share plan, but in any event the
Committee would not make an award of annual variable pay above
500% of base salary.
Executive director service contracts
All current executive directors have service contracts, which may be
terminated by the Company for breach by the executive or by giving
12 months’ notice by the Company or the individual.
Service contacts for new directors will generally be limited to 12 months’
notice. However, the Committee may agree a longer period, of up to 24
months initially, reducing by one month for every month served until it falls
to 12 months.
Terms and conditions for non-executive directors
The appointment of the non-executive directors is for a fixed term of three
years, during which period the appointment may be terminated by the
Board on six months’ notice. The Chairman’s term of appointment is five
years. There are no provisions on payment for early termination in letters
of appointment.
The letters of appointment of non-executive directors and service
contracts of executive directors are available for inspection at the
Company’s registered office during normal business hours and will
be available at the Annual General Meeting.
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Directors’ annual remuneration report
Single figure for total remuneration (audited information)
The following table sets out the single figure for total remuneration for executive directors for the financial years ended 30 September 2013 and 2014.
(a)
Salary/fees
£’000
(b)
Benefits1
£’000
(c)
Bonus2
£’000
(d)
Pension3
£’000
(e)
PSP awards4
£’000
Total
£’000
2014
765
360
Director
Executive directors
G S Berruyer5
S Hare6
Non-executive directors7
D H Brydon
R Markland
N Berkett
D Hall
J Howell
I Kuznetsova
I Mason
M Rolfe
360
88
60
45
74
34
10
13
2013
2014
2013
2014
2013
2014
2013
2014
2013
2014
2013
719
–
360
87
15
–
23
–
59
76
121
15
120
–
539
256
651
–
191
89
180
–
46
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
1,616
720
1,670
–
406
88
60
45
74
34
10
13
360
87
15
–
23
–
59
76
Notes:
1 Benefits provided to the executive directors included: car benefits or cash equivalent, private medical insurance, permanent health insurance, life assurance
and financial advice. A housing allowance of £100,000 per annum was provided to Guy Berruyer. Donald Brydon receives a company car benefit.
2 Bonus payable in respect of the financial year including any deferred element at face value at date of award. Further information about how the level of 2014
award was determined is provided in the additional disclosures below.
3 Pension emoluments for both executive directors were equal to 25% of base salary.
4 The 2014 PSP value is based on the PSP award due to vest in March 2015. The value of the award is based on performance to 30 September 2014.
Further information about the level of vesting is provided in the additional disclosures below.
5 The CEO’s salary increase of 8% to £780,000 was with effect from 1 January 2014. The figures stated in the table above are pro rata.
6 Steve Hare was appointed as a Director on 3 January 2014. Figures in the table relate to the period from that date to the end of the financial year.
7 Changes in the composition of the non-executive directors during 2014 were the retirements of I Mason and M Rolfe on 30 November 2013, D Hall joining
on 1 January 2014 and I Kuznetsova joining on 6 March 2014.
Additional disclosures for single figure for total remuneration table
Base salary
2014
As reported in the last Annual Report & Accounts, the Committee agreed to increase the CEO’s base salary to £780,000 effective from 1 January 2014.
This increase moved the CEO’s salary in line with a level that the Committee felt was appropriate for the role. The CEO was recruited in 2010 on
a significantly lower base salary than his predecessor (whose salary was £770,000 on departure in 2010) with a view to increasing the salary level
once established in the role. The decision was based upon the CEO’s strong performance in the role, and ongoing commitment
to the Group over the last three years.
The new CFO was hired on a base salary of £480,000.
2013
Base salaries were increased by 1.5% from 1 January 2013, and reflect the level of salary budget increases in our key employment markets.
Annual bonus
2014
The bonus targets for 2014 were set by reference to the same measures as the previous year and remain aligned with the three-year strategic goals.
The actual target range has not been disclosed as this is considered by the Board to be commercially sensitive information, whereas many of our
competitors are unlisted companies who do not provide this level of disclosure. An indication of where actual performance fell within the range is
given in the table below. It is intended for retrospective disclosure to be made after a period of three years, and continue on a rolling basis.
The Sage Group plc | Annual Report & Accounts 2014
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Directors’ remuneration report continued
Directors’ annual remuneration report continued
2014 Annual bonus
Bonus measure
%
Weighting Threshold
Target
Stretch
Underlying PBT1 50
Organic revenue
growth
30
Strategic
measures
(see table below) 20
Overall
assessment
Shared measures
Measures specific to CEO
Measures specific to CFO
Performance outcome as a % of maximum bonus
Achievement of £340m for 2014 was ahead of the target
range, resulting in 62% of the maximum bonus in relation to
underlying PBT becoming payable.
Organic revenue growth was 5%, within the target range,
and the profit underpin was exceeded, leading to 57% of
the bonus relating to the organic revenue growth measure
becoming payable.
Guy Berruyer’s strategic objectives achievement for 2014
led to 37% of the bonus relating to strategic measures
becoming payable.
Steve Hare’s strategic objectives for 2014 were close to target
which led to 45% of the bonus relating to strategic measures
becoming payable.
Guy Berruyer received a bonus equal to 69% of salary
(55% of the maximum). No bonus was deferred into shares
as the CEO has met the Company’s shareholding requirement
of 150% of annual salary.
Steve Hare received a bonus equal to 71% of salary (57% of
the maximum). 20% was deferred into Sage shares under the
Company’s shareholding requirement of 150% of annual salary.
1 PBT is defined as statutory profit before tax excluding recurring items including amortisation of acquired intangible assets, acquisition-related items, fair value adjustments
and imputed interest; and non-recurring items that management judge to be one-off or non-operational. The impact of foreign exchange is neutralised in prior
year figures.
Executive directors’ personal strategic objectives
CEO measures
Payment strategy
Successful conclusion of our payments strategy review
Organisation
Maintain momentum in organisational change to support our strategy
for both short and long-term strategies
Cloud products
Improve cloud solutions, increasing product offerings to achieve
desired run rates across products and geographical segmentations
Net promoter scores
Improve customer net promoter scores
CFO measures
Global Finance strategy
Define vision, strategy and resulting implementation commitments
for Global Finance
KPIs
Implement revised reporting of KPIs to the Board and Executive
Committee
Cloud products
Improve cloud solutions, increasing product offerings to achieve
desired run rates across products and geographical segmentations
Net promoter scores
Improve our net promoter scores through a focused approach
to providing an extraordinary customer experience
2013
As in 2014, the bonus was based on 50% profitability, 30% organic revenue growth, with PBT underpin and 20% strategic measures. None of
the bonus for the year was deferred because Mr Berruyer had met the shareholding requirement in full.
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PSP awards
Performance period
Grant date
Vesting date
Vesting % (see performance below)
2014
1 Oct 2011 – 30 Sept 2014
March 2012
March 2015
0%
2013
1 Oct 2010 – 30 Sept 2013
March 2011
March 2014
0%
Performance
Award for the period was based on EPS growth in excess of RPI over three years. Awards are also subject to a TSR multiplier whereby the level of
vesting based on EPS performance is adjusted according to TSR performance over the same period.
Achieved
EPS1
RPI + 7.9%
Threshold/
Vesting %
RPI + 9%/
25%
2014
Stretch
Maximum
vesting % Vesting % Achieved
RPI + 27%/
100%
0% RPI + 6%
Threshold/
Vesting %
RPI + 9%/
25%
2013
Stretch
Maximum
vesting % Vesting %
RPI + 27%/
100%
TSR percentile rank
Vesting % (EPS * TSR)
Notes:
Lower quartile/
75%
Upper quartile/
150%
29th2
79%
0%
Lower quartile/
75%
Upper quartile/
150%
43rd3
0%
93%
0%
1 EPS – For all PSP awards, EPS refers to earnings per share before recurring items including amortisation of acquired intangible assets, acquisition-related items, fair value
adjustments, imputed interest and non-recurring items management judge to be one-off or non-operational. These adjustments are net of tax and the impact of foreign
exchange is neutralised in prior year EPS. This measure has been selected since the timing of acquisitions can be unpredictable, with the result that the amortisation charge
in respect of intangible assets is inherently difficult to budget. The neutralised foreign currency basis has been selected as the Board considers this to be consistent with the
presentation and assessment of results by shareholders.
2 TSR Peer Group FTSE 100 index at the start of the performance period (1 October 2012), excluding financial services and extracting companies.
3 TSR Peer Group:
Adobe Systems
Cegid
Micro Focus International
SAP
ARM Holdings
Dassault Systemes
Microsoft
Software AG
Blackbaud
Cap Gemini
Exact
Intuit
Oracle
Salesforce.com
Awards granted in 2014
Awards granted under the PSP in 2014 will vest depending on performance against three equally weighted measures, measured over three years:
– 1/3 organic revenue growth with a margin underpin
– 1/3 EPS growth
– 1/3 relative TSR performance against the FTSE 100 (excluding financial services and extracting companies)
For each measure, three levels of performance are defined below, with straight-line vesting between each level of performance: target, stretch
and exceptional.
The performance targets applying to the award granted during the financial year are:
Measure
EPS growth (CAGR)
Relative TSR
Organic revenue growth (CAGR)
Between target and stretch
Between 6% and 12%
Between median and upper quartile
Between 4% and 8%
Between stretch and exceptional
Between 12% and 15% (or above)
Between upper quartile and upper decile (or above)
Between 8% and 10% (or above)
As outlined in the policy table, awards are made in shares and the number of shares is determined based on a percentage of base salary.
The following table sets out details of awards of conditional shares made during the year under the PSP.
Date of award
10 March 2014
10 March 2014
Face value
250% of salary
250% of salary
Threshold performance
(% of face value)
Maximum performance
(% of face value)
End of
performance period
20%
20%
100% 30 September 2016
100% 30 September 2016
Amount vesting
CEO
CFO
Notes:
– The face value has been calculated using the share price the day before the day of grant of 419p.
– These awards vest on the third anniversary of the date of award.
The Sage Group plc | Annual Report & Accounts 2014
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Directors’ remuneration report continued
Directors’ annual remuneration report continued
Loss of office payments
No payments for loss of office were made to past directors during the year. No payments have been made that have not already been included in
the single figure of remuneration set out earlier in this report.
Change in remuneration of CEO compared to Group employees
The table below shows the percentage change in total remuneration of the CEO with a comparator group of UK employees over the same time period.
Salary
Taxable benefits
Annual incentive
Notes:
CEO
+8%1
+1%
-17%
UK Employees
+5.6%2
+10%
+12%3
1 Referencing last year’s disclosure, the increase reflects Guy Berruyer’s growth in the role and moved his salary to a more appropriately competitive level. The decision
considered the CEO’s strong performance in the role and ongoing commitment to the Group over the last three years and aligns his pay with that of his predecessor.
2 The percentage change for UK Group employees shown is the 2014 annual pay review and promotions/market adjustments during 2014.
3 For annual incentives, the comparator group used is the UK management population.
Historical executive pay and Company performance
The table below summarises the CEO single figure for total remuneration, annual bonus payout and PSP vesting as a percentage of maximum
opportunity for the current year and previous five years.
CEO single figure of remuneration (in £’000)
Annual bonus payout (as % maximum opportunity)
PSP vesting (as % of maximum opportunity)
Notes:
1 Guy Berruyer was appointed CEO on 1 October 2010.
2 Paul Walker resigned as CEO on 1 October 2010.
CEO
Guy Berruyer1
Paul Walker2
Guy Berruyer
Paul Walker
Guy Berruyer
Paul Walker
2009
–
1,797
–
38%
–
74%
2010
–
2,196
–
83%
–
26%
2011
2,935
–
66%
–
61%
–
2012
1,196
–
21%
–
0%
–
2013
1,670
–
72%
–
0%
–
2014
1,616
–
55%
–
0%
–
The graph below shows the total shareholder return of the Group and the FTSE 100 over the last six years. The FTSE 100 index is the index against
which the TSR of the Group should be measured because of the comparable size of the companies which comprise that index.
Historical Group performance against FTSE 100
Value (£)
250
200
150
100
50
30-Sep-08
30-Sep-09
30-Sep-10
30-Sep-11
30-Sep-12
30-Sep-13
30-Sep-14
Sage
FTSE 100 Index
Notes:
– This graph shows the value, by 30 September 2014, of £100 invested in The Sage Group plc on 30 September 2008 compared with the value of £100 invested in the
FTSE 100 index. The other points plotted are the values at intervening financial year ends.
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Relative importance of spend on pay
The charts below show the all-employee pay cost (as stated in the notes to the accounts), profit before tax and returns to shareholders by
way of dividends and share buyback for 2013 and 2014.
The information shown in this chart is based on the following:
– Underlying PBT – Underlying profit before income tax taken from table on page 104
– Returns to shareholders – Total dividends taken from note 14.5 on page 149, share buyback taken from consolidated statement of
changes in equity on page 107
– Total employee pay – Total staff costs from note 3.3 on page 118, including wages and salaries, social security costs, pension and
share-based payments
Underlying PBT (£m)
Returns to shareholders (£m)
Total employee pay (£m)
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622
617
Flat
340
340
Ordinary dividends
+3%
126
122
Special dividends
-100%
199
Buyback
-64%
251
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2014
2013
2014
2013
2014
2013
91
2014
2013
2014
Notes:
– The 2013 reported PBT figure includes the profit contribution from certain products disposed of during 2013.
– The returns to shareholders for 2013 includes significant returns to meet the leverage target of 1x net debt to EBITDA, which included the proceeds from the non-core
disposals. In 2014, we have used the buyback to help maintain the leverage target and have continued to pursue a progressive dividend policy.
Statement of implementation of remuneration policy in the following financial year
Appointment of the CEO
Stephen Kelly joined the Board as CEO on 5 November 2014. On an ongoing basis, he will be entitled to receive an annual bonus
and award under the PSP to the same extent as his predecessor.
His remuneration package is set out below:
– Base salary – £790,000 per annum, subject to review in January 2016. In considering the new CEO’s base salary, the Committee referenced
Mr Kelly’s previous experience and external market benchmarking as well as the timing of his commencement which was after the Company’s
normal annual salary review. Mr Kelly’s salary represents an increase of just over 1% of the departing CEO’s salary
– Annual bonus – 75% of base salary for on-target performance and 125% of salary for maximum performance in line with current policy
– Long-term incentives – a standard PSP award equal to 250% of base salary in the year in line with normal policy. The award will be subject to
performance conditions set out below and a three-year performance period
– In addition, and to further align his incentives with shareholders, he received a one-off PSP award of 125% of base salary with a six-year
vesting period. This award will vest at the end of the financial year 2019/20 provided that the Group’s TSR CAGR has been at least 15% over
the period from the date of the award to the vesting date, with 20% of the award vesting if, over the period in question, the Group’s TSR is
equal to the median of the performance of the companies in the FTSE 100 (excluding Financials and Mining) and 100% of the award vesting
if TSR is equal to or greater than the upper quartile performance of companies in the FTSE 100 (excluding Financials and Mining). No payment
has been made to buyout awards from his previous employer
– Benefits – provided in line with our policy
– Pension – a Company contribution to the defined contribution plan of 25% of base salary. He will be eligible to receive some or all of his
pension allowance in cash if he elects to do so, in line with our pension policy
– Shareholding guidelines – all executive directors are required to hold 150% of their annual salary in the Company’s shares. Until this
requirement is met, 20% of his bonus will be deferred into shares and he will retain (net of any shares sold to meet tax liability) 50% of shares
vesting from deferred bonus, PSP and exercise of options
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Directors’ annual remuneration report continued
Retirement of the CEO
Guy Berruyer will be paid his base salary and contractual benefits until his termination date of 31 March 2015. Mr Berruyer continued to receive
a housing allowance and will be eligible for a bonus for the period he remained CEO up to and including 5 November 2014. Such bonus will be
payable in alignment with the Company’s annual bonus timeline and performance measures. He will not receive a PSP award for 2015.
Any unlapsed options granted under the Sage Group Executive Share Option Scheme will be exercisable for a period of six months following his
termination date. Awards granted under the Sage PSP may be retained and will be exercisable in accordance with the plan rules. These awards
will vest at the end of their respective performance periods pro rata to the time elapsed between the date of grant of the relevant award and his
termination date, and to the extent that the relevant performance targets have been met over the full performance period.
Components of remuneration
Effective from 1 January 2014, the base salary for the outgoing CEO was £780,000. The base salary for the new CEO, effective from
his joining on 5 November 2014 is £790,000.
The new CFO was appointed on a base salary of £480,000. His salary increased to £494,400, an increase of 3%, with effect from 1 January 2015.
The CFO’s pension provision (25% of salary) and benefits remain unchanged from 2014.
Pension and benefits are in line with benefits stated in the policy table.
The maximum bonus opportunity under our annual bonus plan is unchanged in 2015 at 125% of salary. 20% off any bonus must be deferred
into shares by the CEO and CFO until they are compliant with their shareholding requirement of 150% of salary. The performance measures remain
50% profitability (underlying PBT), 30% organic revenue growth and 20% strategic measures, unchanged from 2014. Targets are not disclosed because
they are considered by the Board to be commercially sensitive. Many of our competitors are unlisted companies and not required to disclose targets;
our disclosure could provide our competitors with a considerable advantage. It is intended for retrospective disclosure to be made after a period of three
years, in alignment with our three-year strategy, and continue to be made on a rolling basis.
The CEO and CFO received a standard PSP award of 250% of base salary in 2015. As outlined above, the CEO also received a one-off joining
award under the PSP.
The extent of vesting of the standard PSP award will be assessed against three equally weighted, independently measured metrics:
– 1/3 organic revenue growth with a margin underpin
– 1/3 EPS growth
– 1/3 relative TSR performance against the FTSE 100 (excluding financial services and extracting companies)
The long-term measures remain unchanged from 2014.
Measure
EPS growth (CAGR)
Relative TSR
Organic revenue growth (CAGR)
Between target and stretch
Between 6% and 12%
Between median and upper quartile
Between 4% and 8%
Between stretch and exceptional
Between 12% and 15% (or above)
Between upper quartile and upper decile (or above)
Between 8% and 10% (or above)
Remuneration policy review
Further to the recent publication of the UK Corporate Governance Code, the Committee will, during 2015, consider the extension of clawback
and malus provisions in relation to annual incentives. Implementation of any changes would be considered for the following financial year.
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Illustration of our remuneration policy for 2015
The tables below set out an illustration of the remuneration policy in line with the remuneration policy above and include base salary, pension,
benefits and incentives.
The tables provide an illustration of the proportion of total remuneration made up of each component of the remuneration policy and the value of
each component. Benefits are calculated as per the single figure of remuneration.
Four scenarios have been illustrated for each executive director:
Below threshold performance No bonus payout
Target performance
Stretch performance
No vesting under the Performance Share Plan
75% of salary payout in annual bonus (60% of maximum opportunity)
Shares equivalent to 50% of salary vesting under the Performance Share Plan (20% of total shares available)
125% of salary payout in annual bonus (100% of maximum opportunity)
Exceptional performance
Shares equivalent to 200% of salary vesting under the Performance Share Plan vesting (80% of total shares available)
125% of salary payout in annual bonus (100% of maximum opportunity)
Shares equivalent to 250% of salary vesting under the Performance Share Plan vesting (100% of total shares awarded)
The scenarios below do not take into account share price appreciation or dividends. For the purpose of the illustrations the value of each
component has been rounded to the nearest £1,000.
CEO policy
Exceptional (%)
Stretch (%)
Target (%)
Below
threshold (%)
16
4
0
18
5 0
20
23
40
20
£4,958,700
36
18
£4,366,200
36
9 1
27
18
9
£2,193,700
78
20 2
£1,008,700
£0
£1,000,000
£2,000,000
£3,000,000
£4,000,000
£5,000,000
CFO policy
Exceptional (%)
10 3 0
Stretch (%)
11 3
0
13
14
23 6
1
17
11
£1,265,867
78 19 3
£641,867
Target (%)
Below
threshold (%)
25
£2,513,867
23
£2,264,267
£0
£1,000,000
£2,000,000
£3,000,000
£4,000,000
£5,000,000
Salary Pension Benefits Annual bonus (including any deferred amounts) Long-term incentives One-off PSP
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Directors’ annual remuneration report continued
Directors’ shareholdings and share interests (audited information)
Executive directors are required to hold 150% of their annual salary in the Company’s shares. Until this requirement is met, executive directors
must defer 20% of their bonus into shares, and retain (net of any shares sold to meet tax liability) 50% of shares received from deferred bonus,
PSP and exercise of options.
At the year-end, Guy Berruyer met the requirement, while 20% of Steve Hare’s bonus was deferred into shares.
Interests in shares
The interests of each person who was a director of the Company as at 30 September 2014 (together with interests held by his or her connected
persons) were:
Director
G S Berruyer
D H Brydon
R Markland
N Berkett
D Hall
S Hare
J Howell
I Kuznetsova
Total
Notes:
Ordinary
shares at
30 September
2014 number
712,434
53,024
4,753
27,999
10,000
0
12,833
0
821,043
Ordinary
shares at
30 September
2013 number
705,232
38,024
4,753
28,000
0
0
12,833
0
798,842
– There have been no changes in the directors’ holdings in the share capital of the Company, as set out in the table above, between 30 September 2014 and the date
of this report.
– For information, Stephen Kelly’s shareholding as at the date of this report was 67,500 shares.
Details of the executive directors’ interests in outstanding share awards under the ESOS, PSP, deferred shares and all-employee plans are set
out below.
Executive share options (audited information)
The Group’s only executive share option scheme is the ESOS. In the year under review, executive directors did not receive grants under this scheme.
The outstanding executive share options granted to each director of the Company under the executive share option schemes, including the ESOS,
are as follows:
Exercise price
per share
198.00p
258.50p
270.00p
Shares under
option at
1 October
2013
number
189,082
122,630
62,008
373,720
Director
G S Berruyer
Total
Notes:
Granted
during
the year
number
Exercised
during
the year
number
Lapsed
during
the year
number
Shares under
option at
30 September
2014
number
189,082
122,630
62,008
373,720
Date exercisable
6 January 2008 – 6 January 2015
10 January 2009 – 10 January 2016
10 January 2010 – 10 January 2017
– No options were varied during the year.
– The performance criteria for options which became exercisable on or after 6 January 2008 are based on EPS growth measured over a fixed three-year period from
the start of the financial year in which the grant was made. 30% of options would vest at the end of the period if the increase in EPS exceeded RPI by 15% (an average
of 5% per year) and 100% of those options would vest if RPI was exceeded in that period by 27% (an average of 9% per year). Between those points, options vest on
a straight-line basis. There was no further retesting.
– The market price of a share of the Company at 30 September 2014 was 365.40p and the lowest and highest market price during the year was 311.60p and
439.78p respectively.
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Performance Share Plan (audited information)
The outstanding awards granted to each executive director of the Company under the Performance Share Plan are as follows:
Director
G S Berruyer
S Hare
Total
Notes:
Under award
1 October
2013
number
–
527,286
476,062
737,795
1,741,143
–
–
–
1,741,143
Awarded
during
the year
number
464,894
–
–
–
464,894
286,088
116,873
402,961
867,855
Vested
during
the year
number
–
–
–
–
–
–
–
–
–
Lapsed
during
the year
number
–
–
–
(737,795)
(737,795)
–
–
–
(737,795)
Under award
30 September
2014
number
464,894
527,286
476,062
0
1,468,242
286,088
116,873
402,961
1,871,203
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Vesting date
10 March 2017
14 March 2016
12 March 2015
–
10 March 2017
20 January 2017
– No variations were made in the terms of the awards in the year.
– The market price of a share on 10 March 2014, the date of the awards made in the year ended 30 September 2014, was 419p.
– The performance condition for awards made in March 2011, 2012 and 2014 is set out earlier in this report. The performance condition for awards made in March 2013 and
January 2014 is the same as the condition for March 2014.
Deferred shares (audited information)
The outstanding awards granted to each executive director of the Company under The Sage Group Deferred Bonus Plan are as follows:
Director
G S Berruyer
Total
Notes:
Shares at
1 October
2013
number
12,404
12,404
Shares awarded
during
the year
number
–
–
Shares vested
during
the year
number
12,404
12,404
Shares lapsed
during
the year
number
–
–
Shares at
30 September
2014
number
0
0
Vesting date
10 January 2014
– Awards of shares will vest on the third anniversary of the date of grant. In the event that a director ceases to be an employee of the Group for reasons other than death,
retirement, redundancy, injury, ill-health or disability before the third anniversary of the date of grant then the rights to the award will lapse, unless the Remuneration
Committee recommends otherwise.
– Awards are not subject to further performance conditions once granted.
– No variations were made in the terms of the awards in the year.
There are limits on the number of newly issued and treasury shares that can be used to satisfy awards under the Group’s employee share schemes
in any 10-year period. The limits and the Group’s current position against those limits as at 27 November 2014 (the last practicable date prior to
publication of this document) are set out below:
Limit
7.5% of Group’s share capital can be used for discretionary share schemes
10% of Group’s share capital can be used for all share schemes
Current position
3.35%
4.14%
The Company has previously satisfied all awards under the Performance Share Plan through the market purchase of shares or transfer of treasury
shares and will continue to consider which is the most appropriate approach, based on the relevant factors at the time.
External appointments
Executive directors are permitted, where appropriate and with Board approval, to take non-executive directorships with other organisations in order
to broaden their knowledge and experience in other markets and countries. Fees received by the directors in their capacity as directors of these
companies are retained, reflecting the personal responsibility they undertake in these roles. Mr G S Berruyer is a Non-executive Director of Meggitt Plc.
For the year under review, fees in respect of this non-executive directorship were £52,687.56.
The Board recognises the significant demands that are made on executive and non-executive directors and has therefore adopted a policy that
no executive director should hold more than two directorships of other listed companies. The Board encourages executive directors to limit other
directorships to one listed company. Except in exceptional circumstances where approved in advance by the Chairman of the Committee, if an executive
director holds non-executive positions at more than one listed company then only the fees from one such company will be retained by the director.
No formal limit on other board appointments applies to non-executive directors under the policy but prior approval (not to be unreasonably withheld)
from the Chairman on behalf of the Board is required in the case of any new appointment. In the case of the Chairman, prior approval of the Nomination
Committee is required on behalf of the Board.
The Sage Group plc | Annual Report & Accounts 2014
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Directors’ remuneration report continued
Directors’ annual remuneration report continued
Unexpired term of contract table
Director
Executive directors
G S Berruyer
S Hare
Non-executive directors
N Berkett
D H Brydon
J Howell
R Markland
D Hall
I Kuznetsova
Date of contract
Unexpired term of contract on
30 September 2014, or on
date of contract if later
1 October 2010
3 January 2014
5 July 2013
6 July 2012
15 May 2013
13 September 2012
3 January 2014
6 March 2014
6 months
12 months
1.5 years
3 years
1.5 years
1 year
2.5 years
2.5 years
Notice period under contract
12 months from the Company and/or individual
12 months from the Company and/or individual
6 months from the Company or 1 month from individual
6 months from the Company and/or individual
6 months from the Company or 1 month from individual
6 months from the Company or 1 month from individual
6 months from the Company or 1 month from individual
6 months from the Company or 1 month from individual
Consideration by the directors of matters relating to directors’ remuneration
The following directors were members of the Remuneration Committee when matters relating to the directors’ remuneration for the year were
being considered:
– Ms R Markland (Chair)
– Mr D H Brydon
– Mr N Berkett
– Mr D Hall
– Mr J Howell
– Ms I Kuznetsova
The Committee received assistance from Mr R Drury (Group Human Resources Director), Ms R Fyffe (former Director of Performance and
Reward) and Mr M J Robinson (Company Secretary) and other members of management, who may attend meetings by invitation, except
when matters relating to their own remuneration are being discussed.
External advisers
The Remuneration Committee continues to receive advice from Deloitte, an independent firm of remuneration consultants appointed by the Committee
after consultation with the Board. During the year, Deloitte’s executive compensation advisory practice advised the Committee on developments in
market practice, corporate governance, institutional investor views and in the development of the Company’s incentive arrangements. Total fees for
advice provided to the Committee during the year were £60,450.
The Committee is satisfied that the advice they have received has been objective and independent.
Deloitte is a founding member of the Remuneration Consultants Group and adheres to its Code in relation to executive remuneration consulting in the
UK. Other parts of Deloitte have provided tax advice, specific corporate finance support in the context of merger and acquisition activity and unrelated
corporate advisory services.
Statement of shareholding voting
The table below sets out the results of the vote on the Remuneration report and the Remuneration policy respectively at the 2014 AGM:
Remuneration report
Remuneration policy
Number
795,851,111
778,225,813
%
96.20%
94.98%
Number
31,404,471
41,157,395
%
3.80%
5.02%
Votes cast
827,255,582
819,383,208
Votes withheld
2,134,887
10,007,261
Votes for
Votes against
Ruth Markland
Chairman of the Remuneration Committee
3 December 2014
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Directors’ report
The directors present their report together with the audited consolidated
financial statements for the year ended 30 September 2014.
The Annual Report & Accounts contains statements that are not based
on current or historical fact and are forward-looking in nature. Please
refer to the "Disclaimer" on page 97.
Strategic report
The information that fulfils the reporting requirements relating to
the following matters can be found on the following pages of the
Strategic report:
Page
47 – Financial and operating review in the
Subject matter
Important events
since the year-end
Future developments 10 – Performance review in the Strategic report
Greenhouse gas
emissions
55 – Environment section of the
Strategic report
Strategic report
Corporate governance statement
The Disclosure and Transparency Rules ("DTR") require certain information
to be included in a corporate governance statement in the Directors’
report. This information can be found in the Corporate governance report
on pages 61 to 76, which is incorporated into this Directors’ report by
reference and, in the case of the information referred to in DTR 7.2.6, in
this Directors’ report.
Disclosure of information under Listing Rule 9.8.4
Information on allotments of shares for cash pursuant to the Group
employee share schemes can be found on page 144 within the
notes to the Group financial statements.
Results and dividends
The results for the year are set out on page 104. Full details of the
proposed final dividend payment for the year ended 30 September
2014 are set out on page 149. The Board is proposing a final dividend
of 8.00p per share following the payment of an interim dividend of
4.12p per share on 6 June 2014. The proposed total dividend for
the year is therefore 12.12p per share.
Going concern
The following statement has been included in accordance with
the Listing Rules: Based on normal business planning and control
procedures, the directors have a reasonable expectation that the
Company and the Group have adequate resources to continue
in operational existence for the foreseeable future. For this reason,
the directors continue to adopt the going concern basis in preparing
the accounts.
Research and development
During the year, we invested £131m (2013: £145m) in research
and development.
Political donations
No political donations were made in the year.
Directors and their interests
A list of directors, their interests in the ordinary share capital of the
Company, their interests in its long-term performance share plan and
details of their options over the ordinary share capital of the Company
are given in the Directors’ remuneration report on page 90. No director
had a material interest in any significant contract, other than a service
contract or contract for services, with the Company or any of its
operating companies at any time during the year.
The names of all persons who, at any time during the year, were
directors of the Company can be found on pages 62 to 63 under Board
of Directors and Changes to the Board.
As at the date of this report, indemnities (which are qualifying third-party
indemnity provisions under the Companies Act 2006) are in place
under which the Company has agreed to indemnify the directors of the
Company and the former directors of the Company who held office during
the year ended 30 September 2014, to the extent permitted by law and
by the Company’s articles of association, in respect of all liabilities incurred
in connection with the performance of their duties as a director of the
Company or its subsidiaries. Copies of these indemnities are available
for review at the Company’s registered office.
Employment policy
The Group continues to give full and fair consideration to applications
for employment made by disabled persons, having regard to their
respective aptitudes and abilities. The policy includes, where practicable,
the continued employment of those who may become disabled during
their employment and the provision of training and career development
and promotion, where appropriate. The Group has continued its policy
of employee involvement by making information available to employees
on matters of concern to them. Employees regularly receive updates
on the financial and economic factors affecting the Group from both
central and local management. Many employees are stakeholders in the
Company through participation in share option schemes and a long-term
performance share plan. Further details of employment policies are given
on pages 51 to 54.
The Sage Group plc | Annual Report & Accounts 2014
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Directors’ report continued
Substantial shareholdings
At 30 September 2014, the Company had been notified, in accordance
with the DTRs, of the following interests in its ordinary share capital:
Name
Aberdeen Asset
Managers
Schroders plc
Aviva plc
Ordinary shares
% of capital
Nature of holding
61,706,538
55,221,546
50,389,626
5.62
5.02
4.59
Indirect
Indirect
Direct and indirect
In the period from 30 September 2014 to 27 November 2014, we received
no further notifications. Information provided to the Company under the
DTRs is publically available via the regulatory information service and on the
Company website.
Share capital
The Company’s share capital is as set out on page 144. The Company
has a single class of share capital which is divided into ordinary shares
of 14/77p each.
Rights and obligations attaching to shares
Voting
In a general meeting of the Company, subject to the provisions of the
articles of association and to any special rights or restrictions as to voting
attached to any class of shares in the Company (of which there are none):
– On a show of hands, a qualifying person (being an individual who
is a member of the Company, a person authorised to act as the
representative of a corporation or a person appointed as a proxy
of a member) shall have one vote, except that a proxy has one
vote for and one vote against a resolution if the proxy has been
appointed by more than one member and has been given conflicting
voting instructions by those members, or has been given discretion
as to how to vote
– On a poll, every member who is present in person or by proxy
shall have one vote for every share of which he or she is the holder
No member shall be entitled to vote at any general meeting or class
meeting in respect of any shares held by him or her if any call or other
sum then payable by him or her in respect of that share remains unpaid.
Currently, all issued shares are fully paid.
Deadlines for voting rights
Full details of the deadlines for exercising voting rights in respect of the
resolutions to be considered at the Annual General Meeting to be held
on 3 March 2015 will be set out in the Notice of Annual General Meeting.
Dividends and distributions
Subject to the provisions of the Companies Act 2006, the Company may,
by ordinary resolution, declare a dividend to be paid to the members,
but no dividend shall exceed the amount recommended by the Board.
The Board may pay interim dividends, and also any fixed rate dividend,
whenever the financial position of the Company, in the opinion of the
Board, justifies its payment. All dividends shall be apportioned and paid
pro-rata according to the amounts paid up on the shares.
Liquidation
If the Company is in liquidation, the liquidator may, with the authority
of a special resolution of the Company and any other authority required
by the statutes (as defined in the articles of association):
– Divide among the members in specie the whole or any part of the
assets of the Company; or
– Vest the whole or any part of the assets in trustees upon such trusts
for the benefit of members as the liquidator, with the like authority,
shall think fit
Transfer of shares
Subject to the articles of association, any member may transfer all or any
of his or her certificated shares by an instrument of transfer in any usual
form or in any other form which the Board may approve. The Board may,
in its absolute discretion, decline to register any instrument of transfer
of a certificated share which is not a fully paid share (although not so as
to prevent dealings in shares taking place on an open and proper basis)
or on which the Company has a lien.
The Board may also decline to register a transfer of a certificated share
unless the instrument of transfer is: (i) left at the office, or at such other
place as the Board may decide, for registration; and (ii) accompanied by
the certificate for the shares to be transferred and such other evidence
(if any) as the Board may reasonably require to prove the title of the
intending transferor or his or her right to transfer the shares.
The Board may permit any class of shares in the Company to be held
in uncertificated form and, subject to the articles of association, title to
uncertificated shares to be transferred by means of a relevant system
and may revoke any such permission. Registration of a transfer of an
uncertificated share may be refused where permitted by the statutes
(as defined in the articles of association).
Repurchase of shares
The Company obtained shareholder authority at the last Annual General
Meeting (6 March 2014) to buy back up to 109,710,822 ordinary shares.
The minimum price which must be paid for each ordinary share is its
nominal value and the maximum price is the higher of 105% of the
average of the middle market quotations for an ordinary share as derived
from the London Stock Exchange Daily Official List for the five business
days immediately before the purchase is made and the amount stipulated
by article 5(1) of the Buy-back and Stabilisation Regulation 2003 (in each
case exclusive of expenses).
In the year under review, the Company repurchased a total of 24,206,805
ordinary shares of 14/77p each at prices between 312.3p and 399.0p per
share. The aggregate amount of consideration paid was £90m. Following
repurchase, these shares were held in treasury. The rationale for these
share repurchases is referred to on page 35 in the Strategic report. The
movement in earnings per share comprises profit growth and a change
in the weighted average share base as a result of share repurchases, the
impact of which is as follows:
2013
Due to change in underlying profit after tax
Due to change in weighted average share base
2014
% chg
1.3%
6.9%
8.2%
Underlying
basic EPS
20.98
0.27
1.44
22.69
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In the year under review no treasury shares were cancelled.
On 30 September 2014, the Company appointed Citigroup Global
Markets Ltd (“Citi”) to manage an irrevocable buyback programme during
the close period which commenced on 1 October 2014 and will run up
to 3 December 2014. From 1 October 2014 to 27 November 2014, the
last practicable date prior to publication of the Annual Report & Accounts,
3,457,020 ordinary shares of 14/77p each were repurchased through Citi
at a weighted average price of 363.8p per share. The highest and lowest
prices paid for these shares were 390.7p per share and 347.0p per share
respectively. The purchased shares have not been cancelled and are held
as treasury shares. These shares represent 0.3% of the issued share
capital. The total number of ordinary shares in issue (excluding shares
held as treasury shares) at 27 November 2014 is 1,076,443,965.
Amendment of the Company’s articles of association
Any amendments to the Company’s articles of association may be made
in accordance with the provisions of the Companies Act 2006 by way of
special resolution.
Appointment and replacement of directors
Directors shall be no less than two and no more than 15 in number.
Directors may be appointed by the Company by ordinary resolution or
by the Board. A director appointed by the Board holds office only until
the next Annual General Meeting and is then eligible for election by the
shareholders. The Board may from time to time appoint one or more
directors to hold employment or executive office for such period (subject
to the Companies Act 2006) and on such terms as they may determine
and may revoke or terminate any such appointment.
Under the articles of association, at every Annual General Meeting of the
Company, every director shall retire from office (but shall be eligible for
election or re-election by the shareholders). The Company may by special
resolution (or by ordinary resolution of which special notice has been
given) remove and the Board, by unanimous decision, may remove any
director before the expiration of his or her term of office. The office of
director shall be vacated if: (i) he or she resigns; (ii) he or she has become
physically or mentally incapable of acting as a director and may remain so
for more than three months, or by reason of his or her mental health a
court has made an order that prevents the director from acting and, in
either case, the Board resolves that his or her office is vacated; (iii) he or
she is absent without permission of the Board from meetings of the Board
for six consecutive months and the Board resolves that his or her office is
vacated; (iv) he or she becomes bankrupt or makes an arrangement or
composition with his or her creditors generally; (v) he or she is prohibited
by law from being a director; or (vi) he or she is removed from office
pursuant to the articles of association.
Powers of the directors
The business of the Company will be managed by the Board who may
exercise all the powers of the Company, subject to the provisions of the
Company’s articles of association, the Companies Act 2006 and any
ordinary resolution of the Company.
Shares held in the Employee Benefit Trust
The trustee of The Sage Group plc Employee Benefit Trust (“EBT”) has
agreed not to vote any shares held in the EBT at any general meeting.
If any offer is made to shareholders to acquire their shares the trustee will
not be obliged to accept or reject the offer in respect of any shares which
are at that time subject to subsisting awards, but will have regard to the
interests of the award holders and will have power to consult them to
obtain their views on the offer. Subject to the above the trustee may take
the action with respect to the offer it thinks fair.
Significant agreements
The following significant agreements contain provisions entitling the
counterparties to exercise termination or other rights in the event of a
change of control of the Company:
– Under a dual tranche US$551 million and €218 million five-year
multi-currency revolving credit facility agreement dated 26 June
2014 between, amongst others, the Company and Lloyds Bank plc
(as facility agent), on a change of control, if any individual lender so
requires and after having consulted with the Company in good faith
for not less than 30 days following the change of control, the facility
agent shall, by not less than 10 business days’ notice to the
Company, cancel the commitment of that lender and declare
the participation of that lender in all outstanding loans, together
with accrued interest and all other amounts accrued under the
finance documents, immediately due and payable, whereupon
the commitment of that lender will be cancelled and all such
outstanding amounts will become immediately due and payable
– Under a note purchase agreement dated 11 March 2010 relating
to US$200 million senior notes, Series A, due 11 March 2015,
US$50 million senior notes, Series B, due 11 March 2016 and
US$50 million senior notes, Series C, due 11 March 2017 between
the Company and the note holders, on a change of control, the
Company will not take any action that consummates or finalises a
change of control unless at least 15 business days prior to such
action it shall have given to each holder of notes written notice
containing and constituting an offer to prepay all notes on a date
specified in such offer which shall be a business day occurring
subsequent to the effective date of the change of control which is
not less than 30 days or more than 60 days after the date of the
notice of prepayments. Where a holder of notes accepts the offer
to prepay, the prepayment shall be 100% of the principal amount
of the notes together with accrued and unpaid interest thereon and
shall be made on the proposed prepayment date. No prepayment
under a change of control shall include any premium of any kind
The Sage Group plc | Annual Report & Accounts 2014
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Directors’ report continued
– Under a note purchase agreement dated 20 May 2013
relating to US$50 million senior notes, Series D, due 20 May
2018, US$150 million senior notes, Series E, due 20 May 2020,
US$150 million senior notes, Series F, due 20 May 2023 and
US$50 million senior notes, Series G, due 20 May 2025 between
Sage Treasury Company Ltd and the note holders and guaranteed
by the Company, on a change of control of the Company, the
Company will not take any action that consummates or finalises
a change of control unless at least 15 business days prior to
such action it shall have given to each holder of notes written
notice containing and constituting an offer to prepay all notes
on a date specified in such offer which shall be a business day
occurring subsequent to the effective date of the change of
control which is not less than 30 days or more than 60 days after
the date of the notice of prepayments. Where a holder of notes
accepts the offer to prepay, the prepayment shall be 100% of
the principal amount of the notes together with accrued and
unpaid interest thereon and shall be made on the proposed
prepayment date. No prepayment under a change of control
shall include any premium of any kind
Under the terms of all three agreements, a “change of control” occurs
if any person or group of persons acting in concert gains control of
the Company.
Financial risk management
The Group’s exposure to and management of capital, liquidity,
credit, interest rate and foreign currency risk are summarised below.
Capital risk
The Group’s objectives when managing capital (defined as net debt plus
equity) are to safeguard our ability to continue as a going concern in order
to provide returns to shareholders and benefits for other stakeholders,
while optimising return to shareholders through an appropriate balance
of debt and equity funding. The Group manages its capital structure and
makes adjustments to it with respect to changes in economic conditions
and our strategic objectives. The Group has set a long-term minimum
leverage target of 1x net debt to EBITDA and will work to maintain this
going forward.
Liquidity risk
The Group manages its exposure to liquidity risk by reviewing cash
resources required to meet business objectives through both short and
long-term cash flow forecasts. The Company has committed facilities
which are available to be drawn for general corporate purposes including
working capital. The Treasury function has a policy of optimising the level
of cash in the businesses in order to minimise external borrowings.
Credit risk
The Group’s credit risk primarily arises from trade and other receivables.
The Group has a very low operational credit risk due to the transactions
being principally of a high volume, low value and short maturity. The
Group has no significant concentration of operational credit risk,
with the exposure spread over a large number of counterparties and
customers. Continued strong credit control ensured that in the year
ended 30 September 2014 the Group did not see deterioration in
days’ sales outstanding.
The credit risk on liquid funds is considered to be low, as the Board-
approved Group treasury policy limits the value that can be invested
with each approved counterparty to minimise the risk of loss.
All counterparties must meet minimum credit rating requirements.
Interest rate risk
The Group is exposed to interest rate risk on floating rate deposits and
borrowings. The US private placement loan notes, which comprise 80%
of borrowings, are at fixed interest rates and bank debt, which comprises
20% of borrowings, are at floating interest rates. At 30 September 2014,
the Group had £145m of cash and cash equivalents.
The Group regularly reviews forecast debt, cash and cash equivalents
and interest rates to monitor this risk. Interest rates on debt and deposits
are fixed when management decides this is appropriate. At 30 September
2014, the Group’s principal borrowings comprised US private placement
loan notes of £432m (2013: £432m), which have an average fixed interest
rate of 3.88%, and bank debt of £111m (2013: £10m), which has an
average floating interest rate of 1.21%. An explanation of this increase
is on page 46 of the Financial and operating review.
Foreign currency risk
Although a substantial proportion of the Group’s revenue and profit is
earned outside the UK, operating companies generally only trade in their
own currency. The Group is therefore not subject to any significant foreign
exchange transactional exposure within these subsidiaries. The Group’s
principal exposure to foreign currency, therefore, lies in the translation of
overseas profits into sterling.
This exposure is partly hedged to the extent that these profits are offset
by interest charges in the same currency arising from the financing of
the investment cost of overseas acquisitions by borrowings in the same
currency. The Group is also exposed to a foreign exchange transaction
exposure from the conversion of surplus cash generated by its principal
overseas subsidiaries, which would be hedged where appropriate.
The Group’s US Dollar denominated borrowings are designated as
a hedge of the net investment in its subsidiaries in the US. The foreign
exchange movements on translation of the borrowings into Sterling have
been recognised in the translation reserve. The Group’s other currency
exposures comprise only those exposures that give rise to net currency
gains and losses to be recognised in the income statement. Such
exposures reflect the monetary assets and liabilities of the Group that
are not denominated in the operating (or “functional”) currency of
the entity involved. At 30 September 2013 and 30 September 2014,
these exposures were immaterial to the Group.
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Disclaimer
The purpose of this Annual Report & Accounts is to provide information
to the members of the Company. The Annual Report & Accounts has
been prepared for, and only for, the members of the Company, as a body,
and no other persons. The Company, its directors and employees, agents
or advisers do not accept or assume responsibility to any other person
to whom this document is shown or into whose hands it may come and
any such responsibility or liability is expressly disclaimed.
The Annual Report & Accounts contains certain forward-looking
statements with respect to the operations, performance and financial
condition of the Group. By their nature, these statements involve
uncertainty since future events and circumstances can cause results
and developments to differ materially from those anticipated. The
forward-looking statements reflect knowledge and information available
at the date of preparation of this Annual Report & Accounts and the
Company undertakes no obligation to update these forward-looking
statements. Nothing in this Annual Report & Accounts should be
construed as a profit forecast.
Statement of directors’ responsibilities
The directors are responsible for preparing the Annual Report & Accounts,
including the Directors’ remuneration report and the Group and parent
Company financial statements, in accordance with applicable law
and regulations.
Company law requires the directors to prepare financial statements
for each financial year. Under that law the directors have prepared the
Group financial statements in accordance with International Financial
Reporting Standards (“IFRS”) as adopted by the European Union (“EU”)
and the parent Company financial statements in accordance with United
Kingdom Generally Accepted Accounting Practice (United Kingdom
Accounting Standards and applicable law). Under company law, the
directors must not approve the financial statements unless they are
satisfied that they give a true and fair view of the state of affairs of the
Company and the Group and of the profit or loss of the Group and the
Company for that period.
In preparing these financial statements the directors are required to:
– Select suitable accounting policies and then apply them consistently
The directors are responsible for keeping adequate accounting records
that are sufficient to show and explain the Company’s transactions and
disclose with reasonable accuracy at any time the financial position of the
Company and the Group and to enable them to ensure that the financial
statements and the Directors’ remuneration report comply with the
Companies Act 2006 and, as regards the Group’s financial statements,
Article 4 of the International Accounting Standards Regulation. They are
also responsible for safeguarding the assets of the Company and the
Group and hence for taking reasonable steps for the prevention and
detection of fraud and other irregularities.
Directors’ statement
The directors as at the date of this report, whose names and functions
are listed in the Board of Directors on pages 62 to 63, confirm that:
– To the best of their knowledge, the Group’s financial statements,
which have been prepared in accordance with IFRS as adopted
by the EU, give a true and fair view of the assets, liabilities, financial
position and profit of the Group
– To the best of their knowledge, the Directors’ report and the
Strategic report include a fair review of the development and
performance of the business and the position of the Group, together
with a description of the principal risks and uncertainties that it faces
Each director as at the date of this report further confirms that:
– So far as the director is aware, there is no relevant audit information
of which the Company’s auditors are unaware
– The director has taken all the steps that he or she ought to have
taken as a director in order to make himself/herself aware of any
relevant audit information and to establish that the Company’s
auditors are aware of that information
This confirmation is given and should be interpreted in accordance
with the provisions of section 418 of the Companies Act 2006.
In addition, the directors as at the date of this report consider that the
Annual Report & Accounts, taken as a whole, is fair, balanced and
understandable and provides the information necessary for shareholders
to assess the Company’s and the Group’s performance, business
model and strategy.
– Make judgements and estimates that are reasonable and prudent
By Order of the Board
– State whether IFRS as adopted by the EU, and applicable UK
Accounting Standards have been followed, subject to any material
departures disclosed and explained in the Group and parent
Company financial statements respectively
M J Robinson,
Company Secretary
– Prepare the financial statements on the going concern basis,
3 December 2014
unless it is inappropriate to presume that the Company will continue
in business
The Sage Group plc | Annual Report & Accounts 2014
97
Contents
Group financial statements
Group financial statements
Our Group financial statements provide a complete picture
of our 2014 performance.
Independent auditors’ report to the to the members of The Sage Group plc
99
Consolidated income statement
Consolidated statement of comprehensive income
Consolidated balance sheet
Consolidated statement of changes in equity
Consolidated statement of cash flows
104
105
106
107
109
Notes to the Group financial statements
Supplementary notes to the Group financial statements.
1. Basis of preparation and critical accounting estimates and judgements
110
Results for the year
2. Segment information
3. Profit before income tax
4. Income tax expense
5. Earnings per share
Operating assets and liabilities
6. Intangible assets
7. Property, plant and equipment
8. Working capital
9. Post-employment benefits
10. Deferred income tax
11. Contingent liabilities
Net debt and capital structure
12. Cash flow and net debt
13. Financial instruments
14. Equity
Other notes
15. Acquisitions and disposals
16. Related party transactions
17. Events after the reporting period
18. Principal subsidiaries
112
116
121
122
124
127
129
132
135
137
138
140
143
150
153
153
153
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Independent auditors’ report to the members of The Sage Group plc
Report on the group financial statements
Our opinion
In our opinion, The Sage Group plc’s group financial statements (the “financial statements”):
– give a true and fair view of the state of the group’s affairs as at 30 September 2014 and of its profit and cash flows for the year then ended;
– have been properly prepared in accordance with International Financial Reporting Standards (“IFRSs”) as adopted by the European Union; and
– have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
What we have audited
The Sage Group plc’s financial statements comprise:
– the consolidated balance sheet as at 30 September 2014;
– the consolidated income statement and consolidated statement of comprehensive income for the year then ended;
– the consolidated statement of cash flows for the year then ended;
– the consolidated statement of changes in equity for the year then ended; and
– the notes to the financial statements, which include a summary of significant accounting policies and other explanatory information.
The financial reporting framework that has been applied in the preparation of the financial statements is applicable law and IFRSs as adopted
by the European Union.
Our audit approach
Overview
Materiality
Audit scope
Areas of
focus
Materiality
– Overall group materiality: £16 million which represents 5% of adjusted profit before tax.
Audit scope
– We performed an audit of the complete financial information of 13 reporting units.
– Of these reporting units, the 3 most significant, representing 66% of the group by revenue and
77% by adjusted profit before tax, were visited by the group team during the audit process.
– The 13 reporting units where we performed audit work accounted for approximately 96% of
group revenue and 96% of the group by adjusted profit before tax.
Areas of focus
– Goodwill impairment assessment
– Revenue recognition
– Provisions for uncertain tax positions
– Archer litigation
The scope of our audit and our areas of focus
We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) (“ISAs (UK & Ireland)”).
We designed our audit by determining materiality and assessing the risks of material misstatement in the financial statements. In particular, we
looked at where the directors made subjective judgements, for example in respect of significant accounting estimates that involved making assumptions
and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal
controls, including evaluating whether there is evidence of bias by the directors that may represent a risk of material misstatement due to fraud.
The risks of material misstatement that had the greatest effect on our audit, including the allocation of our resources and effort, are identified as
“areas of focus” in the table below together with an explanation of how we tailored our audit to address these specific areas. This is not a complete
list of all risks identified by our audit.
The results of our audit work on the areas below were based on the evidence obtained to support our opinion on the financial statements as a whole.
The Sage Group plc | Annual Report & Accounts 2014
99
Independent auditors’ report to the members of The Sage Group plc continued
Area of focus
Goodwill impairment assessment
Refer to page 73 (Audit Committee Report), page 111 (Critical
accounting estimates and judgements), and pages 124-126 (notes).
We focused on this area due to the size of the goodwill balance
(£1,433.0 million as at 30 September 2014), and because the directors’
assessment of the ‘value in use’ of the group’s Cash Generating Units
(“CGUs”) involves judgements about the future results of the business
and the discount rates applied to future cash flow forecasts.
In particular, we focused our audit effort on goodwill recognised in relation
to the Brazil CGU due to the impairment charge of £44.3 million recognised
in the current year. The remaining goodwill balance related to Brazil is
approximately £76.8 million. The Brazilian business was acquired by the
group in 2012, but performance since acquisition has been impacted by a
general deterioration in the macroeconomic environment in Brazil, resulting
in the current year impairment.
The most significant element of the goodwill balance is that recognised on
the two US CGUs, SBS and SPS, totalling £687.7m. Although, based on
historical performance, the Directors believe there is significant headroom
between the value in use of the CGUs and their carrying value, this remained
an area of focus for us as a result of the size of the related goodwill balance.
Revenue recognition
Refer to page 73 (Audit Committee Report), page 111 (Critical accounting
estimates and judgements), and page 116 (notes).
We focused on this area because the timing of revenue recognition and
its presentation in the income statement has inherent complexities in the
software industry. These mainly involve accounting for ‘bundled’ transactions
where software and maintenance and support elements are purchased
together, with the portion of the fee relating to software being recognised
immediately and the remainder of the revenue relating to maintenance
and support being deferred and recognised over the contractual period.
There is opportunity to misstate the allocation of revenue between the
software/licence and maintenance and support elements of each individual
transaction, especially when discounts to the list price are offered. As such,
there is the potential for error and for management manipulation of the
timing of revenue recognition.
There is also a risk of error in terms of the calculation of the deferral of
revenue, as systems in various territories are not standardised, with the
use of spreadsheets common across the group.
How our audit addressed the area of focus
We evaluated and challenged the composition of management’s future cash
flow forecasts, and the process by which they were drawn up. In particular, we
focused on whether they had identified all the relevant CGUs, including Brazil
and the US. We found that management had followed their clearly documented
process for drawing up the future cash flow forecasts, which was subject to
timely oversight and challenge by the Directors and which was consistent
with the Board approved budgets.
We compared the current year actual results with the FY14 figures
included in the prior year forecast to consider whether any forecasts included
assumptions that, with hindsight, had been optimistic. Actual performance
in Brazil was found to be lower than what had been expected and therefore
management has reflected actual FY14 revenue growth rates and operating
margins in this year’s model. We feel this judgement is appropriate given the
past performance of Brazil.
For all CGUs, and in particular, Brazil and the US we also challenged
management’s assumptions in the forecasts for:
– long term growth rates, by comparing them to economic and industry
forecasts; and
– the discount rate, by assessing the cost of capital for the company and
comparable organisations, as well as considering territory specific factors.
We found the assumptions to be consistent and in line with our expectations.
We challenged management on the adequacy of their sensitivity calculations
over all their identified CGUs. We determined that the calculations were most
sensitive to assumptions for revenue growth rates and discount rates. For all
CGUs other than Brazil we calculated the degree to which these assumptions
would need to move before an impairment conclusion was triggered. We
discussed the likelihood of such a movement with management and agreed
with their conclusion that it was unlikely.
In respect of Brazil we found the assumptions for revenue growth (11% per
annum), operating margin (26%) and discount rate (17%) to be acceptable
although note that any change in these assumptions would have a direct
impact on the impairment charge.
We tested the apportionment of revenue for licence, software and maintenance
and support was in compliance with Sage’s accounting manual and
recalculated the allocation between these elements of revenue on a sample of
transactions. Where discounts had been given we tested that they had been
appropriately allocated between the multiple revenue elements.
We also tested a sample of transactions to ensure that the amount of revenue
deferred was accurately calculated and appropriately recognised. This involved
agreeing revenue for maintenance and support services to invoice terms and
supporting calculations.
For transactions close to the period end we tested that cut-off procedures
were appropriately applied.
Additionally, where revenue was recorded through journal entries outside of
normal business processes we performed testing to establish whether a service
had been provided or a sale had occurred in the financial year to support the
revenue recognised.
No significant issues were noted from our work.
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Area of focus
How our audit addressed the area of focus
Provisions for uncertain tax positions
Refer to page 73 (Audit Committee Report), page 111 (Critical
accounting estimates and judgements) and pages 121-122 (notes).
We focused on this area due to the judgement required in assessing the
level of provisions to cover the risk of challenge of certain of the group’s
tax positions. Provisions are held principally in respect of deferred tax
assets, current tax deductions previously taken and ongoing tax audits.
Archer litigation
Refer to page 47 (Strategic report), 73 (Audit Committee Report) and page
111 (Critical accounting estimates and judgements) and page 120 (notes).
A compensation claim against the group by Archer Capital for approximately
AUS$144m (£88m) is currently the subject of legal proceedings. This claim
is for compensation in respect of an aborted deal to acquire an Australian
software company. The court case took place early in FY14, and a judgment
is expected in the near future. We focused on this issue as there is uncertainty
as to the likely outcome. The Directors have not made a provision for
settlement on the basis they consider the likelihood of loss to be remote.
We evaluated and challenged management’s rationale for the level of provisions
held. We considered the status of recent and current tax audits and enquiries,
the outturn of previous claims and the macro-tax environment in each territory.
We obtained and assessed, where relevant, third party advice that management
had used to formulate the provisions. We also considered any penalty regimes
that could apply should any of the tax positions be successfully challenged.
From the evidence obtained we consider the level of provisioning to be
acceptable in the context of materiality. We note, however, that the assumptions
and judgements that are required to formulate the provisions mean that the
range of possible outturns is broad.
We discussed this issue with internal and external legal counsel and read
available external information in order to understand the latest position of the
proceedings and assess management’s views as to the strength of the claim
against the group. From the evidence obtained we agreed with management’s
decision not to make a provision. However, given the uncertainty involved,
the matter is not without risk.
How we tailored the audit scope
We tailored the scope of our audit to ensure that we performed enough work to be able to give an opinion on the financial statements as a whole,
taking into account the geographic structure of the group, the accounting processes and controls, and the industry in which the group operates.
The group’s trading operations are made up of operating businesses situated in a number of territories across the globe. The group financial statements
are a consolidation of 18 reporting units, comprising the group’s operating businesses and head office function.
In establishing the overall approach to the group audit, we determined the type of work that needed to be performed at the reporting units by us, as the
group engagement team, or component auditors within PwC UK and from other PwC network firms operating under our instruction. Where the work
was performed by component auditors, we determined the level of involvement we needed to have in the audit work at those reporting units to be able
to conclude whether sufficient appropriate audit evidence had been obtained as a basis for our opinion on the group financial statements as a whole.
Accordingly, of the group's 18 reporting units, we performed an audit of the complete financial information of 13 reporting units, which were selected
either due to their size, or their risk characteristics. This gave us coverage over 96% of the group by revenue. As part of our year end audit procedures,
the group team visited the UK, French and US component teams (the three most significant units in the group). These visits involved discussing the
audit approach and any issues arising from our work, as well as meeting local management. In addition to this, the group team attended all clearance
meetings, including Brazil, either in person or by call. This, together with additional procedures performed at the group level, gave us the evidence we
needed for our opinion on the group financial statements as a whole.
Materiality
The scope of our audit is influenced by our application of materiality. We set certain quantitative thresholds for materiality. These, together with
qualitative considerations, helped us to determine the scope of our audit and the nature, timing and extent of our audit procedures and to evaluate
the effect of misstatements, both individually and on the financial statements as a whole.
Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:
Overall group materiality
£16 million (2013: £16 million).
How we determined it
5% of adjusted profit before tax (adjusted to add back the goodwill impairment charge of £44.3m).
Rationale for benchmark applied
We believe that profit before tax, adjusted for exceptional costs, provides us with a consistent year on year
basis for determining materiality by eliminating the non-recurring disproportionate impact of these items.
We agreed with the Audit Committee that we would report to them misstatements identified during our audit above £0.8 million (2013: £0.8 million)
as well as misstatements below that amount that, in our view, warranted reporting for qualitative reasons.
The Sage Group plc | Annual Report & Accounts 2014
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Independent auditors’ report to the members of The Sage Group plc continued
Going concern
Under the Listing Rules we are required to review the directors’ statement, set out on page 93, in relation to going concern. We have nothing to report
having performed our review.
As noted in the directors’ statement, the directors have concluded that it is appropriate to prepare the financial statements using the going concern
basis of accounting. The going concern basis presumes that the group has adequate resources to remain in operation, and that the directors intend it
to do so, for at least one year from the date the financial statements were signed. As part of our audit we have concluded that the directors’ use of the
going concern basis is appropriate.
However, because not all future events or conditions can be predicted, these statements are not a guarantee as to the group’s ability to continue as
a going concern.
Other required reporting
Consistency of other information
Companies Act 2006 opinion
In our opinion, the information given in the Strategic Report and the Directors’ Report for the financial year for which the financial statements are
prepared is consistent with the financial statements.
ISAs (UK & Ireland) reporting
Under ISAs (UK & Ireland) we are required to report to you if, in our opinion:
– information in the Annual Report is:
– materially inconsistent with the information in the audited financial statements; or
– apparently materially incorrect based on, or materially inconsistent with, our knowledge of the
group acquired in the course of performing our audit; or
– otherwise misleading.
– the statement given by the directors on page 97, in accordance with provision C.1.1 of the UK
Corporate Governance Code (“the Code”), that they consider the Annual Report taken as a whole to
be fair, balanced and understandable and provides the information necessary for members to assess
the group’s performance, business model and strategy is materially inconsistent with our knowledge
of the group acquired in the course of performing our audit.
– the section of the Annual Report on page 72, as required by provision C.3.8 of the Code, describing
the work of the Audit Committee does not appropriately address matters communicated by us to the
Audit Committee.
We have no exceptions to report arising
from this responsibility.
We have no exceptions to report arising
from this responsibility.
We have no exceptions to report arising
from this responsibility.
Adequacy of information and explanations received
Under the Companies Act 2006 we are required to report to you if, in our opinion, we have not received all the information and explanations we
require for our audit. We have no exceptions to report arising from this responsibility.
Directors’ remuneration
Under the Companies Act 2006 we are required to report to you if, in our opinion, certain disclosures of directors’ remuneration specified by law
are not made. We have no exceptions to report arising from this responsibility.
Corporate governance statement
Under the Listing Rules we are required to review the part of the Corporate Governance Statement relating to the parent company’s compliance
with nine provisions of the UK Corporate Governance Code. We have nothing to report having performed our review.
Responsibilities for the financial statements and the audit
Our responsibilities and those of the directors
As explained more fully in the Statement of directors’ responsibilities set out on page 97, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and fair view.
Our responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and ISAs (UK & Ireland).
Those standards require us to comply with the Auditing Practices Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the company’s members as a body in accordance with Chapter 3 of Part
16 of the Companies Act 2006 and for no other purpose. We do not, in giving these opinions, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
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What an audit of financial statements involves
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the
financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of:
– whether the accounting policies are appropriate to the group’s circumstances and have been consistently applied and adequately disclosed;
– the reasonableness of significant accounting estimates made by the directors; and
– the overall presentation of the financial statements.
We primarily focus our work in these areas by assessing the directors’ judgements against available evidence, forming our own judgements, and
evaluating the disclosures in the financial statements.
We test and examine information, using sampling and other auditing techniques, to the extent we consider necessary to provide a reasonable basis
for us to draw conclusions. We obtain audit evidence through testing the effectiveness of controls, substantive procedures or a combination of both.
In addition, we read all the financial and non-financial information in the Annual Report and Accounts (the “Annual Report”) to identify material
inconsistencies with the audited financial statements and to identify any information that is apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any apparent material misstatements
or inconsistencies we consider the implications for our report.
Other matter
We have reported separately on the parent company financial statements of The Sage Group plc for the year ended 30 September 2014 and on the
information in the Directors’ Remuneration Report that is described as having been audited.
Charles Bowman (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Newcastle upon Tyne
3 December 2014
(a) The maintenance and integrity of the The Sage Group plc website is the responsibility of the directors; the work carried out by the auditors does not involve consideration of these
matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the financial statements since they were initially presented on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
The Sage Group plc | Annual Report & Accounts 2014
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Consolidated income statement
For the year ended 30 September 2014
Revenue
Cost of sales
Gross profit
Selling and administrative expenses
Loss on disposal of non-core products
Operating profit
Finance income
Finance costs
Finance costs – net
Profit before income tax
Income tax expense
Profit for the year
Profit attributable to:
(cid:237) Owners of the parent
(cid:237) Non-controlling interest
Earnings per share attributable to the
owners of the parent (pence)
(cid:237) Basic
(cid:237) Diluted
Note
2.1
Underlying
2014
£m
1,306.8
(74.5)
1,232.3
(872.5)
2.2, 3.2, 3.3
3.5
3.5
3.5
4
14.6
–
359.8
2.1
(22.2)
(20.1)
339.7
(90.5)
249.2
248.3
0.9
249.2
Adjustments
(note 3.6)
2014
£m
–
–
–
(61.4)
–
(61.4)
–
(0.8)
(0.8)
(62.2)
0.7
(61.5)
(61.5)
–
(61.5)
Statutory
2014
£m
1,306.8
(74.5)
1,232.3
(933.9)
–
298.4
2.1
(23.0)
(20.9)
277.5
(89.8)
187.7
186.8
0.9
187.7
Underlying
as reported *
2013
£m
Adjustments
(note 3.6)
2013
£m
1,376.1
(80.2)
1,295.9
(920.1)
–
375.8
1.4
(16.6)
(15.2)
360.6
(99.2)
261.4
260.3
1.1
261.4
–
–
–
(9.4)
(185.9)
(195.3)
–
(1.2)
(1.2)
(196.5)
(17.4)
(213.9)
(213.9)
–
(213.9)
5
5
22.69p
22.65p
17.07p
17.04p
22.27p
22.23p
Statutory
2013
£m
1,376.1
(80.2)
1,295.9
(929.5)
(185.9)
180.5
1.4
(17.8)
(16.4)
164.1
(116.6)
47.5
46.4
1.1
47.5
3.97p
3.96p
All operations in the year relate to continuing operations.
* Underlying as reported is at 2013 reported exchange rates.
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Consolidated statement of comprehensive income
For the year ended 30 September 2014
Profit for the year
Other comprehensive income/(expense):
Items that will not be reclassified to profit or loss:
Actuarial (loss)/gain on post-employment benefit obligations
Deferred tax credit/(charge) on actuarial loss on post-employment benefit obligations
Items that may be reclassified to profit or loss:
Exchange differences on translating foreign operations
Exchange differences recycled to the income statement in respect of the disposal of foreign operations
Other comprehensive expense for the year, net of tax
Total comprehensive income for the year
Total comprehensive income for the year attributable to:
(cid:237) Owners of the parent
(cid:237) Non-controlling interest
Note
14.4
4
14.3
14.3
2014
£m
187.7
(0.4)
0.4
–
(39.6)
–
(39.6)
2013
£m
47.5
1.1
(0.4)
0.7
28.4
(44.5)
(16.1)
(39.6)
(15.4)
148.1
32.1
14.6
147.2
0.9
148.1
31.0
1.1
32.1
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105
Consolidated balance sheet
As at 30 September 2014
Non-current assets
Goodwill
Other intangible assets
Property, plant and equipment
Deferred income tax assets
Current assets
Inventories
Trade and other receivables
Cash and cash equivalents (excluding bank overdrafts)
Total assets
Current liabilities
Trade and other payables
Current income tax liabilities
Borrowings
Other financial liabilities
Deferred consideration
Deferred income
Non-current liabilities
Borrowings
Other financial liabilities
Post-employment benefits
Deferred income tax liabilities
Deferred income
Total liabilities
Net assets
Equity attributable to owners of the parent
Ordinary shares
Share premium
Other reserves
Retained earnings
Non-controlling interest
Total equity
Note
6.1
6.2
7
10
8.1
8.2
12.3
8.3
12.4
13.4
12.4
13.4
9
10
14.1
14.3
14.6
2014
£m
2013
£m
1,433.0
1,515.2
98.1
126.7
21.9
113.5
128.8
18.7
1,679.7
1,776.2
2.0
321.5
144.6
468.1
2.2
311.2
100.8
414.2
2,147.8
2,190.4
(297.3)
(23.7)
(125.4)
(60.1)
(3.5)
(402.7)
(912.7)
(287.6)
(35.7)
(21.0)
(30.0)
(8.2)
(406.8)
(789.3)
(415.8)
(440.6)
–
(13.6)
(19.1)
(2.7)
(54.2)
(12.9)
(23.1)
–
(451.2)
(530.8)
(1,363.9)
(1,320.1)
783.9
870.3
11.7
535.9
88.8
147.5
783.9
–
783.9
11.7
532.2
60.4
267.0
871.3
(1.0)
870.3
The consolidated financial statements on pages 104 to 154 were approved by the Board of Directors on 3 December 2014 and are signed on their behalf by:
S Hare,
Chief Financial Officer
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Consolidated statement of changes in equity
For the year ended 30 September 2014
Attributable to owners of the parent
Ordinary
shares
£m
Share
premium
£m
Other
reserves
£m
Retained
earnings
£m
Non-controlling
interest
£m
Total
£m
Total equity
£m
At 1 October 2013
Profit for the year
Other comprehensive income/(expense):
Exchange differences on translating foreign
operations (note 14.3)
Actuarial loss on post-employment benefit
obligations (note 9)
Deferred tax credit on actuarial gain on
post-employment obligations (note 10)
Total comprehensive (expense)/income
for the year ended 30 September 2014
Transactions with owners:
Employee share option scheme:
(cid:237) Proceeds from shares issued
(cid:237) Value of employee services, net of deferred tax
Purchase of treasury shares (note 14.4)
Expenses related to purchase of treasury shares
Close period share buyback programme (note 13.4)
Purchase of non-controlling interest (note 13.4)
Dividends paid to owners of the parent (note 14.5)
Total transactions with owners
for the year ended 30 September 2014
11.7
532.2
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3.7
–
–
–
–
–
–
3.7
535.9
60.4
–
267.0
186.8
871.3
186.8
(1.0)
0.9
870.3
187.7
(39.6)
–
(39.6)
–
–
(0.4)
(0.4)
0.4
0.4
–
–
–
(39.6)
(0.4)
0.4
(39.6)
186.8
147.2
0.9
148.1
–
–
–
–
–
68.0
–
68.0
88.8
–
7.8
(89.5)
(0.2)
(30.1)
(68.1)
3.7
7.8
(89.5)
(0.2)
(30.1)
(0.1)
(126.2)
(126.2)
(306.3)
(234.6)
147.5
783.9
–
–
–
–
–
0.1
–
0.1
–
3.7
7.8
(89.5)
(0.2)
(30.1)
–
(126.2)
(234.5)
783.9
At 30 September 2014
11.7
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Consolidated statement of changes in equity continued
At 1 October 2012
Profit for the year
Other comprehensive income/(expense):
Exchange differences on translating foreign operations
(note 14.3)
Exchange differences recycled to the income
statement in respect of the disposal of foreign
operations (note 14.3)
Actuarial gain on post-employment benefit obligations
(note 9)
Deferred tax charge on actuarial gain on post-
employment obligations
Total comprehensive (expense)/income
for the year ended 30 September 2013
Transactions with owners:
Employee share option scheme:
(cid:237) Proceeds from shares issued
(cid:237) Value of employee services
Purchase of treasury shares (note 14.4)
Expenses related to purchase of treasury shares
Close period share buyback programme (note 13.4)
Cancellation of treasury shares (note 14.1)
Dividends paid to owners of the parent (note 14.5)
Total transactions with owners
for the year ended 30 September 2013
At 30 September 2013
Attributable to owners of the parent
Ordinary
shares
£m
Share
premium
£m
13.3
524.5
–
–
–
–
–
–
–
–
–
–
–
(1.6)
–
(1.6)
11.7
–
–
–
–
–
–
7.7
–
–
–
–
–
–
7.7
532.2
Other
reserves
£m
76.5
–
Retained
earnings
£m
Non-controlling
interest
£m
Total
£m
Total equity
£m
760.8
1,375.1
46.4
46.4
(2.1)
1.1
1,373.0
47.5
28.4
(44.5)
–
–
–
–
28.4
(44.5)
1.1
1.1
(0.4)
(0.4)
–
–
–
–
28.4
(44.5)
1.1
(0.4)
(16.1)
47.1
31.0
1.1
32.1
–
–
–
–
–
–
–
–
–
2.9
7.7
2.9
(251.0)
(251.0)
(2.0)
30.0
–
(2.0)
30.0
(1.6)
(320.8)
(320.8)
(540.9)
(534.8)
–
–
–
–
–
–
–
–
60.4
267.0
871.3
(1.0)
7.7
2.9
(251.0)
(2.0)
30.0
(1.6)
(320.8)
(534.8)
870.3
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Consolidated statement of cash flows
For the year ended 30 September 2014
Cash flows from operating activities
Cash generated from continuing operations
Interest paid
Income tax paid
Net cash generated from operating activities
Cash flows from investing activities
Acquisitions of subsidiaries, net of cash acquired
Acquisition of other financial assets
Disposal of subsidiaries, net of cash disposed
Purchases of intangible assets
Purchases of property, plant and equipment
Proceeds from sale of property, plant and equipment
Interest received
Net cash generated from investing activities
Cash flows from financing activities
Proceeds from issuance of ordinary shares
Purchase of treasury shares
Purchase of non-controlling interest
Finance lease principal payments
Proceeds from borrowings
Repayments of borrowings
Movements in cash collected from customers
Dividends paid to owners of the parent
Net cash used in financing activities
Net increase in cash, cash equivalents and bank overdrafts
(before exchange rate movement)
Effects of exchange rate movement
Net increase in cash, cash equivalents and bank overdrafts
Cash, cash equivalents and bank overdrafts at 1 October
Cash, cash equivalents and bank overdrafts at 30 September
Note
12.1
2014
£m
382.4
(21.6)
(107.2)
253.6
15.1
(14.1)
15.4
6.2
7
3.5
13.4
14.5
12.2
12.2
12.2
–
–
(8.3)
(19.7)
1.1
2.1
(38.9)
3.7
(91.0)
(50.4)
(1.9)
171.0
(71.8)
15.5
(126.2)
(151.1)
63.6
(2.8)
60.8
82.9
143.7
2013
£m
417.4
(12.6)
(118.6)
286.2
(14.7)
(6.0)
81.4
(9.6)
(14.1)
4.7
1.4
43.1
7.7
(251.0)
–
(1.1)
514.1
(256.5)
9.5
(320.8)
(298.1)
31.2
(2.7)
28.5
54.4
82.9
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109
Basis of preparation and critical accounting estimates and judgements
1 Basis of preparation and critical accounting estimates and judgements
Accounting policies applicable across the financial statements are shown below. Accounting policies that are specific to a component of the financial
statements have been incorporated into the relevant note.
Basis of preparation
The consolidated financial statements of The Sage Group plc have been prepared in accordance with International Financial Reporting Standards
(“IFRS“) as adopted by the European Union (“EU“) and International Financial Reporting Standards Interpretations Committee (“IFRIC“) interpretations as
adopted by the EU. The consolidated financial statements have been prepared under the historical cost convention, except where adopted IFRS require
an alternative treatment. The principal variations from the historical cost convention relate to derivative financial instruments which are measured at fair
value through profit or loss.
The financial statements of the Group comprise the financial statements of the Company and entities controlled by the Company (its subsidiaries)
prepared at the end of the reporting period. The accounting policies have been consistently applied across the Group. Control is achieved where the
Company has the power to govern the financial and operating policies of an entity so as to benefit from its activities.
New or amended accounting standards
The following amended standards have been adopted in the financial statements. These have not had a material impact.
Accounting standard
IAS 19 (revised 2011), “Employee Benefits”
Requirement
This introduces changes to the recognition,
measurement, presentation and disclosure of
post-employment benefits. The effect of this
standard is to remove the previous concept of
recognising an expected return on plan assets.
IFRS 13, “Fair Value Measurement”
This introduces the requirement for entities to
classify fair value measurements into a “fair value
hierarchy” based on the nature of the inputs.
Impact on financial statements
The Group operates two small defined benefit
schemes (the majority of the Group’s employees
are members of defined contribution schemes),
therefore the impact is minimal. We have made
some minor updates to the wording in the
disclosure note however no restatement has
been made on the grounds of materiality.
The disclosure in note 13.1 has been updated
to include the fair value hierarchy.
The following new or amended standards have been adopted in the financial statements but have had no impact on the financial statements.
– Amendment to IAS 1, “Presentation of Financial Statements”
– Amendment to IAS 16, “Property, Plant and Equipment”
– Amendments to IFRS 1, “First-time Adoption of International Financial Reporting Standards”
– Amendment to IFRS 7, “Financial Instruments: Disclosures”
– Amendment to IAS 12, “Income taxes on deferred tax”
Going concern
The Group’s business activities, together with the factors likely to affect its future development, performance and position, are set out in the Strategic
report on pages 2 to 59.
Having made reasonable enquiries, the directors are satisfied that the Group has sufficient resources to continue in operation for the foreseeable future,
a period of not less than 12 months from the date of this report. Accordingly, the consolidated financial statements have been prepared on a going
concern basis and in accordance with those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
Foreign currencies
The consolidated financial statements are presented in sterling, which is the functional currency of the parent Company and the presentation currency
for the consolidated financial statements.
Foreign currency transactions are recorded at the rates of exchange prevailing on the dates of the transactions. Foreign currency monetary items are
translated at the rates prevailing at the end of the reporting period. Non-monetary items carried at fair value that are denominated in foreign currencies
are retranslated at the rates prevailing on the date when the fair value was determined. Non-monetary items that are measured in terms of historical
cost in a foreign currency are not retranslated.
Exchange differences arising on the settlements of monetary items and on the retranslation of monetary items are included in profit or loss for the
period. Exchange differences arising on the retranslation of non-monetary items carried at fair value are included in profit or loss for the period except
for differences arising on the retranslation of non-monetary items in respect of which gains and losses are recognised outside profit or loss. For such
non-monetary items, any exchange component of that gain or loss is also recognised outside profit or loss.
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The assets and liabilities of the Group’s subsidiaries outside of the UK are translated into sterling using period end exchange rates. Income and
expense items are translated at the average exchange rates for the period. Where differences arise between these rates, they are recognised in other
comprehensive income and the translation reserve.
When a foreign operation is partially disposed of or sold, exchange differences that were recorded in other comprehensive income are recycled in the
income statement as part of the gain or loss on sale, with the exception of exchange differences recorded in equity prior to the transition to IFRS on
1 October 2004, in accordance with IFRS 1, “First-time Adoption of International Financial Reporting Standards”.
Critical accounting estimates and judgements
The preparation of financial statements requires the use of accounting estimates and assumptions by management. It also requires management to
exercise its judgement in the process of applying the accounting policies. We continually evaluate our estimates, assumptions and judgements based
on available information. The areas involving a higher degree of judgement or complexity are described below.
Revenue recognition
The key area of judgement in respect of recognising revenue is the timing of recognition, specifically in relation to recognition and deferral of revenue
on licence, support and other contracts where management assumptions and estimates are necessary.
For instance, when products are bundled together for the purpose of sale, the associated revenue, net of any applicable discounts, is allocated between
the constituent parts of the bundle on a relative fair value basis, which determines the pattern of revenue recognition. The Group has a systematic basis
for allocating relative fair values in these situations, based upon published list prices. In the limited circumstances in which published list prices are not
available, a prudent approach is taken, whereby any discounts are recognised immediately. See note 3.1 for the revenue recognition policy.
Goodwill impairment
The judgements in relation to goodwill impairment testing relate to the assumptions applied in calculating the value in use of the operating companies
being tested for impairment and the ongoing appropriateness of the cash-generating units (“CGUs”) for the purpose of impairment testing. The key
assumptions applied in the calculation relate to the future performance expectations of the business. The carrying value of goodwill and the key
assumptions used in performing the annual impairment assessment are disclosed in note 6.1.
Archer Capital litigation
The claim for damages made by Archer Capital in relation to the potential purchase of MYOB continues to be strongly rejected by management.
Based on supporting expert legal advice, management do not consider there to be a present obligation and the possibility of an outflow of resources
is remote. As such, no provision or contingent liability has been recognised in these financial statements.
Tax provisions
The Group recognises certain provisions and accruals in respect of tax which involve a degree of estimation and uncertainty where the tax treatment
cannot be finally determined until a resolution has been reached by the relevant tax authority. Management bases estimates of the likely outcome of
decisions by tax authorities on transactions and events whose treatment for tax purposes is uncertain.
Future accounting standards
The directors also considered the impact on the Group of other new and revised accounting standards, interpretations or amendments. The following
revised and new accounting standards are currently endorsed but not yet effective for the Group for the year ended 30 September 2014. None are
expected to be material to the financial statements.
– Amendment to IAS 27, “Separate Financial Statements”
– Amendment to IAS 28, “Investments in Associates and Joint Ventures”
– Amendment to IAS 32, “Financial Instruments: Presentation”
– Amendment to IAS 36, “Impairment of Assets”
– Amendment to IAS 39, “Financial Instruments: Recognition and Measurement”
– IFRS 10, “Consolidated Financial Statements”
– IFRS 11, “Joint Arrangements”
– IFRS 12, “Disclosure of Interests in Other Entities”
– IFRIC 21, “Levies”
– IFRS 15, “Revenue from contracts with customers” is expected to be effective from 1 January 2017. The directors would not usually look so far
ahead at new accounting standards; however, it is expected that this new standard may have a significant impact on revenue recognition for the
software industry
The Sage Group plc | Annual Report & Accounts 2014
111
Results for the year
2 Segment information
This note shows how Group revenue and Group operating profit are split across the three geographical regions in which we operate, being
Europe, Americas and Africa, Australia, Middle East and Asia (“AAMEA”).
For each geographical region, revenue and operating profit are compared to prior year in order to understand the movements in the year.
This comparison is provided for statutory, underlying and organic revenue and operating profit.
– Statutory results are the IFRS statutory results.
– Underlying is a non-GAAP measure. Adjustments are made to statutory results to arrive at an underlying result which is in line with how the
business is managed and measured on a day to day basis. Adjustments are made for items that are individually important in order to understand
the financial performance. If included, these items could distort understanding of the performance for the year and the comparability between
periods. See note 3.6 for details of these adjustments. In addition, the prior year underlying values are translated at current exchange rates,
so that exchange rate impacts do not distort comparisons.
– Organic is a non-GAAP measure. The contributions of current and prior year acquisitions and disposals are removed, so that results can be
compared to prior year on a like for like basis.
In addition, the following reconciliations are made in this note.
– Revenue per region reconciled to the profit for the year as per the income statement.
– Statutory operating profit reconciled to underlying operating profit per region (detailing the adjustments made).
Accounting policy
In accordance with IFRS 8, “Operating Segments”, information for the Group’s operating segments has been derived using the information used
by the chief operating decision maker. The Group’s Executive Committee has been identified as the chief operating decision maker in accordance
with their designated responsibility for the allocation of resources to operating segments and assessing their performance. The Executive Committee
use organic and underlying data to monitor business performance. Operating segments are reported in a manner which is consistent with the
operating segments produced for internal management reporting.
The Group is organised into three operating segments. The UK is the home country of the parent. The main operations are in the following territories:
– Europe (France, UK & Ireland, Spain, Germany, Switzerland, Poland, Portugal and Sagepay)
– Americas (US, Brazil and Canada)
– AAMEA (Africa, Australia, Middle East and Asia)
The Africa operations are principally based in South Africa; the Middle East and Asia operations are principally based in Singapore, Malaysia and UAE.
Segment reporting
The tables below show a segmental analysis of the results for continuing operations.
The revenue analysis in the table below is based on the location of the customer which is not materially different from the location where the order is
received and where the assets are located.
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2.1 Revenue by segment
Year ended 30 September 2014
Statutory
£m
Underlying
adjustments
£m
Underlying
£m
Organic
adjustments
£m
Organic
£m
Statutory
%
Underlying
%
Recurring revenue by segment
Europe
Americas
AAMEA
Recurring revenue
535.8
334.8
81.0
951.6
–
–
–
–
Software and software related services (“SSRS”) revenue by segment
Europe
Americas
AAMEA
SSRS revenue
Total revenue by segment
Europe
Americas
AAMEA
Total revenue
214.6
77.2
63.4
355.2
750.4
412.0
144.4
1,306.8
–
–
–
–
–
–
–
–
535.8
334.8
81.0
951.6
214.6
77.2
63.4
355.2
750.4
412.0
144.4
(0.3)
–
–
(0.3)
535.5
334.8
81.0
951.3
(0.1)
214.5
–
–
77.2
63.4
(0.1)
355.1
(0.4)
–
–
750.0
412.0
144.4
1,306.8
(0.4)
1,306.4
0%
-6%
-3%
-3%
-11%
-15%
-6%
-11%
-3%
-8%
-4%
-5%
3%
1%
14%
3%
-9%
-8%
10%
-6%
-1%
0%
12%
0%
Change
Organic
%
7%
6%
14%
7%
-4%
2%
10%
-1%
4%
5%
12%
5%
Statutory
£m
Underlying
adjustments
£m
Underlying
as reported
£m
Year ended 30 September 2013
Impact of
foreign
exchange
£m
Underlying
£m
Organic
adjustments
£m
Organic
£m
Recurring revenue by segment
Europe
Americas
AAMEA
Recurring revenue
535.2
357.5
83.4
976.1
Software and software related services (“SSRS”) revenue by segment
Europe
Americas
AAMEA
SSRS revenue
Total revenue by segment
Europe
Americas
AAMEA
Total revenue
241.7
90.7
67.6
400.0
776.9
448.2
151.0
1,376.1
–
–
–
–
–
–
–
–
–
–
–
–
535.2
357.5
83.4
976.1
241.7
90.7
67.6
400.0
776.9
448.2
151.0
1,376.1
(12.5)
(27.2)
(12.1)
(51.8)
(4.6)
(7.1)
(10.0)
(21.7)
(17.1)
(34.3)
(22.1)
(73.5)
522.7
330.3
71.3
924.3
237.1
83.6
57.6
378.3
759.8
413.9
128.9
1,302.6
(21.8)
(13.3)
(0.3)
(35.4)
(13.6)
(7.6)
(0.1)
(21.3)
(35.4)
(20.9)
(0.4)
(56.7)
500.9
317.0
71.0
888.9
223.5
76.0
57.5
357.0
724.4
393.0
128.5
1,245.9
The Sage Group plc | Annual Report & Accounts 2014
113
Results for the year continued
2 Segment information continued
2.2 Operating profit by segment
Statutory
£m
Underlying
adjustments
£m
Underlying
£m
Organic
adjustments
£m
Organic
£m
Statutory
%
Underlying
%
Year ended 30 September 2014
Operating profit by segment
Europe
Americas
AAMEA
Total operating profit
206.4
53.0
39.0
298.4
8.4
52.8
0.2
61.4
214.8
105.8
39.2
359.8
–
–
–
–
Statutory
£m
Underlying
adjustments
£m
Underlying as
reported
£m
Operating profit by segment
Europe
Americas
AAMEA
Total operating profit
155.7
(13.7)
38.5
180.5
64.5
128.7
2.1
195.3
The results by segment from continuing operations were as follows:
Year ended 30 September 2014
Revenue
Segment statutory operating profit
Finance income
Finance costs
Profit before income tax
Income tax expense
Profit for the year
220.2
115.0
40.6
375.8
Note
3.5
3.5
4
No single customer contributed more than 10% of the Group’s revenue in the current or prior year.
Reconciliation of underlying operating profit to statutory operating profit
Underlying operating profit
Amortisation of acquired intangible assets
Fair value adjustments and goodwill impairment
Acquisition-related items
Litigation costs
Statutory operating profit
214.8
105.8
39.2
359.8
Impact of
foreign
exchange
£m
(4.9)
(10.9)
(5.0)
(20.8)
33%
487%
1%
65%
0%
2%
10%
1%
Underlying
£m
Organic
adjustments
£m
215.3
104.1
35.6
355.0
(11.7)
(5.9)
(0.3)
(17.9)
Europe
£m
750.4
206.4
Americas
£m
412.0
53.0
AAMEA
£m
144.4
39.0
Europe
£m
214.8
(6.9)
–
(0.1)
(1.4)
206.4
Americas
£m
105.8
(7.3)
(44.7)
(0.8)
–
53.0
AAMEA
£m
39.2
(0.3)
–
0.1
–
39.0
Change
Organic
%
6%
8%
11%
7%
Organic
£m
203.6
98.2
35.3
337.1
Group
£m
1,306.8
298.4
2.1
(23.0)
277.5
(89.8)
187.7
Group
£m
359.8
(14.5)
(44.7)
(0.8)
(1.4)
298.4
Year ended 30 September 2013
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The results by segment from continuing operations were as follows:
Year ended 30 September 2013
Revenue
Segment statutory operating profit/(loss)
Finance income
Finance costs
Profit before income tax
Income tax expense
Profit for the year
Europe
£m
776.9
155.7
Americas
£m
448.2
(13.7)
AAMEA
£m
151.0
38.5
Note
3.5
3.5
4
Year ended 30 September 2013
Reconciliation of underlying operating profit previously reported
to statutory operating profit
Underlying operating profit as previously reported
Amortisation of acquired intangible assets
Fair value adjustments and goodwill impairment
Acquisition-related items
Loss on disposal and litigation costs
Statutory operating profit/(loss)
Europe
£m
220.2
(10.0)
–
–
(54.5)
155.7
Americas
£m
115.0
(8.4)
13.5
(0.1)
(133.7)
(13.7)
AAMEA
£m
40.6
(0.7)
(1.4)
–
–
38.5
Group
£m
1,376.1
180.5
1.4
(17.8)
164.1
(116.6)
47.5
Group
£m
375.8
(19.1)
12.1
(0.1)
(188.2)
180.5
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115
Results for the year continued
3 Profit before income tax
This note sets out the Group’s revenue recognition policy. It also analyses the Group’s profit before tax, by looking in more detail at the key
operating costs, including a breakdown of the costs incurred as an employer, research and development costs, the cost of the external audit
of the Group’s financial statements and finance costs.
In addition, this note analyses the future amounts payable under operating lease agreements, which the Group has entered into as at the
year-end. These commitments are not included as liabilities on the consolidated balance sheet.
This note also provides a breakdown of any material and non-recurring costs that have been reported separately on the face of the
income statement.
3.1 Revenue
Accounting policy
Revenue is measured at the fair value of the consideration received or receivable and represents amounts received or receivable for goods and
services provided in the normal course of business, net of discounts, VAT and other sales-related taxes.
The Group reports revenue under two revenue categories, being;
1. Recurring revenue: including subscription contracts (including pay as you go contracts), maintenance and support, combined software/support
service contracts and payment processing services.
Subscription contract revenue and maintenance and support revenue is recognised on a straight-line basis over the term of the contract (including
non-specified upgrades when included). Revenue relating to future periods is classified as deferred income on the balance sheet.
Payment processing services revenue is recognised when the outcome of such transactions can be estimated reliably; the associated revenue is
recognised by reference to the stage of completion of the transaction at the end of the reporting period.
2. Software and software-related services: including perpetual software licences, upgrades and other software-related services such as business
forms, professional services and training.
Perpetual software licences and specified upgrades revenue is recognised when the significant risks and rewards of ownership relating to the licence
have been transferred and it is probable that the economic benefits associated with the transaction will flow to the Group. This is deemed to be when
the goods have left the warehouse to be shipped to the customer or when electronic delivery has taken place.
Other product revenue (which includes business forms and hardware) is recognised as the products are shipped to the customer.
Where software is sold with after-sales service, the consideration is allocated between the different elements on a relative fair value basis.
When products are bundled together before being sold to the customer, it is necessary to apply the recognition criteria to the separately identifiable
components of a single transaction in order to reflect the substance of the transaction. If discounts on bundles are offered, the discount is applied
to the constituent parts of the bundle, based upon fair value.
Other services (which include the sale of professional services and training) revenue associated with the transaction is recognised by reference to the
stage of completion of the transaction at the end of the reporting period.
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3.2 Operating profit
The following items have been included in arriving at operating profit
Staff costs
Cost of inventories recognised as an expense (included in cost of sales)
Depreciation of property, plant and equipment
Amortisation of intangible assets
Fair value adjustments and goodwill impairment
Loss on disposal of property, plant and equipment
Loss on disposal of intangible assets
Other operating lease rentals payable
Net foreign exchange losses/(gains)
Acquisition-related items
Research and development expenditure
Note
3.3
8.1
7
6.2
3.6
12.1
12.1
3.6
6.2
2014
£m
616.8
12.5
18.0
24.5
44.7
0.8
–
28.8
0.1
0.8
2013
£m
621.9
14.2
20.0
28.5
(12.1)
0.8
0.1
20.9
(0.4)
0.1
131.2
144.6
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Services provided by the Group’s auditors and network firms
During the year, the Group (including its overseas subsidiaries) obtained the following services from the Group’s auditors at costs as detailed below:
Fees payable to the Group’s auditors for the audit of the Plc’s companies and the consolidated accounts
Fees payable to the Group’s auditors for the audit of the Company’s subsidiaries
Fees payable to the Group’s auditors for audit-related assurance services
Total audit fees
Tax compliance services
Tax advisory services
Other non-audit services
Total fees
The total audit fee for the Group, including the audit of overseas subsidiaries, was £2.1m (2013: £2.0m).
The Board’s policy in respect of the procurement of non-audit services for the Group’s auditor is set out on page 75.
2014
£m
0.3
1.7
0.1
2.1
0.6
0.3
0.1
3.1
2013
£m
0.3
1.6
0.1
2.0
0.6
0.4
0.3
3.3
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The Sage Group plc | Annual Report & Accounts 2014
117
Results for the year continued
3 Profit before income tax continued
3.3 Employees and directors
Average monthly number of people employed (including directors)
By geographical location:
Europe
Americas
AAMEA
Staff costs (including directors on service contracts)
Wages and salaries
Social security costs
Post-employment benefits
Share-based payments
Key management compensation
Salaries and short-term employee benefits
Post-employment benefits
Share-based payments
Note
9
14.2
2014
number
2013
number
7,071
3,529
1,994
7,620
3,497
2,124
12,594
13,241
2014
£m
503.4
94.4
11.0
8.0
616.8
2014
£m
5.9
0.5
1.4
7.8
2013
£m
517.1
90.5
11.4
2.9
621.9
2013
£m
6.4
0.5
1.3
8.2
The key management figures given above include directors. Key management personnel are deemed to be members of the Executive Committee as
shown on page 64.
3.4 Operating lease commitments
Accounting policy
Rentals payable under operating leases are charged to the income statement on a straight-line basis over the term of the relevant lease.
Benefits received and receivable as an incentive to enter into an operating lease are also spread on a straight-line basis over the lease term.
Total future minimum lease payments under non-cancellable operating leases falling due for payment as follows:
Within one year
Later than one year and less than five years
After five years
2014
2013
Property,
vehicles, plant
and equipment
£m
Property,
vehicles, plant
and equipment
£m
29.5
77.0
29.8
136.3
33.6
88.1
34.1
155.8
The Group leases various offices and warehouses under non-cancellable operating lease agreements. These leases have various terms, escalation
clauses and renewal rights. The Group also leases vehicles, plant and equipment under non-cancellable operating lease agreements.
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3.5 Finance income and costs
Accounting policy
Finance income and costs are recognised using the effective interest method. Finance costs are recognised in the income statement simultaneously
with the recognition of an increase in a liability or the reduction in an asset.
Finance income: interest income on short-term deposits
Finance costs:
Finance costs on bank borrowings
Finance costs on US senior loan notes
Amortisation of issue costs
Imputed interest on put and call arrangement to acquire non-controlling interest and deferred consideration
Finance costs
Finance costs – net
3.6 Adjustments between underlying and statutory results
2014
£m
2.1
(4.6)
(16.4)
(1.2)
(0.8)
(23.0)
2013
£m
1.4
(1.4)
(14.4)
(0.9)
(1.1)
(17.8)
(20.9)
(16.4)
Accounting policy
The business is managed and measured on a day to day basis using underlying results. To arrive at underlying results, certain adjustments are made
for items that are individually important and which could, if included, distort the understanding of the performance for the year and the comparability
between periods.
Management apply judgement in determining which items should be excluded from underlying performance.
Recurring items
These are items which occur each year but which management judge to have a distorting effect on the underlying results of the Group. These
items relate specifically to merger & acquisition (“M&A”) activity which by its nature is irregular in its impact. Items falling within this category include
amortisation, fair value adjustments and acquisition related costs. These do not include operating or integration costs related to the acquisition.
Recurring items are adjusted each year irrespective of materiality to ensure consistent treatment.
Non-recurring items
These are items which management judge to be of a one-off nature or non-operational, which would distort a reader of the Company’s
accounts understanding of underlying business performance.
The Sage Group plc | Annual Report & Accounts 2014
119
Results for the year continued
3 Profit before income tax continued
3.6 Adjustments between underlying and statutory results continued
Recurring
2014
£m
Non-
recurring
2014
£m
Total
2014
£m
Recurring
2013
£m
Non-
recurring
2013
£m
Acquisition related items
Amortisation of acquired intangibles
Fair value adjustments
Litigation costs
Other acquisition-related items
Other items
Goodwill impairment
Loss on disposal of non-core products
Total adjustments made to operating profit
Acquisition related items
Imputed interest on put and call arrangements to acquire non-controlling
interest and deferred consideration
Total adjustments made to profit before income tax
14.5
0.4
–
0.8
–
–
15.7
0.8
16.5
–
–
1.4
–
44.3
–
45.7
–
45.7
14.5
0.4
1.4
0.8
44.3
–
61.4
0.8
62.2
19.1
(13.5)
–
0.1
–
–
5.7
1.2
6.9
Total
2013
£m
19.1
(13.5)
2.3
0.1
1.4
185.9
195.3
–
–
2.3
–
1.4
185.9
189.6
–
189.6
1.2
196.5
Recurring items
Acquired intangibles are assets which have previously been recognised as part of business combinations. These assets are predominantly brands,
customer relationships and technology rights. Further details including specific accounting policies in relation to these assets can be found in note 6.2.
The fair value adjustment relates to the accounting loss on the settlement of the put and call arrangement to acquire 25% of the share capital of the
Brazilian sub-group from the non-controlling interest holder. This transaction occurred in August 2014. Further details can be found in note 13.4.
The adjustment relating to acquisition-related items is made up of the cost of carrying out business combinations in the year (£2.4m, 2013: £0.1m),
partly offset by the net release of earn-out liabilities on previous acquisitions (£1.6m). Further details can be found in note 15.3.
The imputed interest adjustment on the put and call arrangement relates to the accounting adjustment made during the year to discount this liability to its
present value. This entry was made up until the liability was settled in August 2014. As above, further details can be found in note 13.4.
Non-recurring items
As a result of the annual goodwill impairment review, an impairment of the goodwill held in the Brazilian business has been identified in the year. This
impairment is driven by economic conditions in Brazil and a re-measurement of the future performance of Brazil performed by management. Further
details can be found in note 6.1.
The adjustment relating to litigation costs relates to the defence of the Archer Capital case, which is strongly rejected by management. We have engaged
in a vigorous defence of the case resulting in these non-recurring litigation costs. Based upon legal advice, no provision or contingent liability has been
recognised in these financial statements. All other litigation costs which may be incurred through the normal course of business are charged through
operational expenses.
The loss on disposals in the prior year was incurred as a result of the disposal of non-core products. There are no such costs in the current year.
See note 4 for the tax impact of these adjustments.
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4 Income tax expense
This note analyses the tax charge for this financial year which includes both current and deferred tax. Current tax expense represents the amount
payable on this year’s taxable profits and any adjustments relating to prior years. Deferred tax is an accounting adjustment to provide tax that is
expected to arise in the future due to differences between accounting and tax bases.
This note outlines the tax accounting policies, the current and deferred tax charges in the year and presents a reconciliation of profit before tax in the
income statement to the tax charge.
Accounting policy
The taxation charge for the year represents the sum of the tax currently payable and deferred tax. The charge is recognised in the income statement
and statement of comprehensive income according to the accounting treatment of the related transaction.
Current tax payable or receivable is based on the taxable income for the period and any adjustment in respect of prior periods. Current tax is
calculated using tax rates that have been enacted or substantively enacted at the end of the reporting period.
Deferred tax arises due to certain temporary differences between the carrying amounts of assets and liabilities in the financial statements and the
corresponding tax bases.
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Analysis of charge in the year
Current tax
– Current tax on profit for the year
– Adjustment in respect of prior years
Current tax
Deferred tax
– Origination and reversal of temporary differences
– Adjustment in respect of prior years
Deferred tax
The current year tax charge is split into the following:
Underlying tax charge
Tax (credit)/charge on adjustments between the underlying and statutory operating profit
Income tax expense
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Note
10
2014
£m
101.4
(4.2)
97.2
(5.3)
(2.1)
(7.4)
90.5
(0.7)
89.8
2013
£m
136.6
(6.3)
130.3
(13.6)
(0.1)
(13.7)
99.2
17.4
116.6
The majority of the current tax adjustment in respect of prior years of £4.2m (2013: £6.3m) reflects the resolution of a number of historical tax matters
with the tax authorities.
Tax on items credited to other comprehensive income
Deferred tax (credit)/charge on actuarial loss on post-employment benefit obligations
Total tax on items (credited)/charged to other comprehensive income/equity
2014
£m
(0.4)
(0.4)
2013
£m
0.4
0.4
The Sage Group plc | Annual Report & Accounts 2014
121
Results for the year continued
4 Income tax expense continued
The tax for the year is higher (2013: higher) than the standard rate of corporation tax in the UK of 22% (2013: 23.5%)
The differences are explained below:
Statutory profit on ordinary activities before income tax
Adjustments
Underlying profit on ordinary activities before income tax
Underlying profit on ordinary activities multiplied by rate of corporation tax in the UK of 22% (2013: 23.5 %)
Note
3.6
Tax effects of:
Adjustments in respect of prior years
Adjustments in respect of foreign tax rates
Non-deductible expenses and permanent items net of non-taxable income and other credits
Local business tax
Tax credits
Utilisation of unrecognised losses
Underlying tax charge
Tax (credited)/charged on adjustments between underlying and statutory results
Total statutory income tax
2014
£m
277.5
62.2
339.7
74.7
(6.3)
22.0
(0.6)
2.8
(2.1)
–
90.5
(0.7)
89.8
2013
£m
164.1
196.5
360.6
84.7
(6.4)
24.1
(1.7)
3.3
(2.4)
(2.4)
99.2
17.4
116.6
The underlying effective tax rate of 27% (2013: 28%) is higher than the UK’s statutory rate of tax due to the geographic profile of the Group. In
addition, there is an obligation to account for local business taxes in the corporate tax charge. These additional tax charges are offset by research
and development tax credits which are a government incentive in a number of operating territories.
5 Earnings per share
This note shows how earnings per share (“EPS”) is calculated. EPS is the amount of post-tax profit attributable to each ordinary share. Basic EPS
is calculated on profit for the year attributable to equity shareholders divided by the weighted average number of shares in issue during the year.
Diluted EPS shows what the impact would be if all outstanding share options were exercised and treated as ordinary shares at the year-end.
This note also provides a reconciliation between the statutory profit figure, which ties to the primary statements on page 104, and the Group’s internal
measure of performance, underlying profit. See note 3.6 for details of the adjustments made between statutory and underlying profit, and note 4
for the tax impact on these adjustments.
Accounting policy
Basic earnings per share is calculated by dividing the profit for the year by the weighted average number of ordinary shares in issue during the year,
excluding those held as treasury shares, which are treated as cancelled.
For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all dilutive potential
ordinary shares. The Group has one class of dilutive potential ordinary shares. They are share options granted to employees where the exercise
price is less than the average market price of the Company’s ordinary shares during the year.
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Reconciliations of the earnings and weighted average number of shares
Underlying
2014
Underlying
2013
Statutory
2014
Statutory
2013
Earnings (£m)
Profit for the year
Number of shares (millions)
Weighted average number of shares
Dilutive effects of shares
Earnings per share
Basic earnings per share (pence)
248.3
260.3
186.8
46.4
1,094.4
1,168.8
1,094.4
1,168.8
1.7
2.0
1.7
2.0
1,096.1
1,170.8
1,096.1
1,170.8
22.69
22.27
17.07
Diluted earnings per share (pence)
22.65
22.23
17.04
Reconciliation between statutory and underlying earnings per share
Earnings: Statutory profit for the year
Adjustments:
Intangible amortisation excluding amortisation of acquired intangible assets
Other acquisition-related items
Goodwill impairment and fair value adjustments
Litigation costs
Loss on disposal of non-core products
Imputed interest on put and call arrangement to acquire non-controlling interest and deferred consideration
Taxation on adjustments
Net adjustments
Earnings – underlying profit for the year (before exchange movement)
Exchange movement
Taxation on exchange movement
Net exchange movement
Earnings – underlying profit for the year (after exchange movement)
2014
£m
186.8
14.5
0.8
44.7
1.4
–
0.8
(0.7)
61.5
248.3
248.3
Exchange movement relates to the retranslation of prior year results to current year exchange rates as shown in the table on page 47 within the
financial review.
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3.97
3.96
2013
£m
46.4
19.1
0.1
(12.1)
2.3
185.9
1.2
17.4
213.9
260.3
(10.6)
(4.5)
(15.1)
245.2
The Sage Group plc | Annual Report & Accounts 2014
123
Operating assets and liabilities
6 Intangible assets
This note provides details of the non-physical assets used by the Group to generate revenues and profits. These assets include items such as
goodwill, and other intangible assets such as brands, customer relationships, computer software, intellectual property and technology which have
predominantly been acquired as part of business combinations. These assets are initially measured at fair value, meaning the best estimate of the
value for which these assets could be sold in an arm’s length transaction.
Goodwill represents the excess between the amount paid to acquire the businesses over the fair value of the net assets at the acquisition date.
This section also explains the accounting policies applied and the specific judgements and estimates made by the directors in arriving at the carrying
value of these assets.
6.1 Goodwill
Accounting policy
Goodwill arising from the acquisition of a subsidiary represents the excess of the consideration transferred, the amount of any non-controlling
interest in the acquiree and the acquisition date fair value of any previous equity interest in the acquiree over the fair value of the Group’s total
identifiable net assets acquired. Goodwill is carried at cost less accumulated impairment losses.
Goodwill previously written-off directly to reserves under UK GAAP prior to 1 October 1998 has not been reinstated and is not recycled to the
income statement on the disposal of the business to which it relates. Gains and losses on disposal of the entity include the carrying amount of the
foreign exchange on the goodwill relating to the entity sold (except for goodwill taken to reserves prior to the transition to IFRS on 1 October 2004).
Goodwill is allocated to cash-generating units (“CGUs”) for the purpose of impairment testing. The recoverable amount of the CGU to which the
goodwill relates is tested annually for impairment or when events or changes in circumstances indicate that it might be impaired.
Goodwill is allocated to CGUs expected to benefit from the synergies of the combination and the allocation represents the lowest level at which
goodwill is monitored.
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– Additions
– Disposals
– Exchange movement
At 30 September
Impairment at 1 October
– Impairment in the year
– Exchange movement
At 30 September
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15.1
15.4
2014
£m
2013
£m
1,516.6
1,814.4
7.6
–
(47.5)
1,476.7
1.4
44.3
(2.0)
43.7
11.8
(319.0)
9.4
1,516.6
–
1.4
–
1.4
Net book amount at 30 September
1,433.0
1,515.2
Details of acquisitions and disposals in the year are shown in note 15.
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Goodwill impairment tests
The following table shows the allocation of the carrying value of goodwill at the end of the reporting period by CGU:
France
UK & Ireland
Spain
Sage Pay Europe
Germany
Switzerland
Poland
Portugal
North America
– Sage Business Solutions Division
– Sage Payment Solutions Division
Brazil
South Africa
Australia
Asia
2014
£m
196.7
180.6
112.9
24.2
31.4
32.8
6.2
4.9
533.6
154.1
76.8
39.7
20.4
18.7
2013
£m
212.2
180.6
121.2
25.1
26.4
34.7
6.5
4.1
533.2
156.1
130.8
40.6
24.8
18.9
1,433.0
1,515.2
The Group conducts annual impairment tests by comparing the carrying value of goodwill in the CGU to the recoverable amount of the CGU.
The recoverable amounts of CGUs are determined as the higher of fair value less costs to sell and the value-in-use. In determining value-in-use,
estimated future cash flows are discounted to their present value.
In all cases, the approved plans for the five years following the current financial year form the basis for the cash flow projections for a CGU. Beyond
the five year plan these projections are extrapolated using an estimated long-term growth rate. The key assumptions in the value-in-use calculations
are the average medium term revenue growth rate, the long-term operating margin and the long-term growth rate of net operating cash flows.
– The average medium-term revenue growth rate for the first five years is primarily based on past performance. The average revenue growth
rate applied to CGU’s was in the range of 1% (2013: 2%) to 15% (2013: 14%) reflecting the specific rates for each territory.
– The long-term operating margin assumed for a CGU’s operations is primarily based on past performance. The long-term operating margin applied
to CGUs was in the range of 26% (2013: 20%) to 62% (2013: 47%), reflecting the specific rates for each territory.
– Long-term growth rates of net operating cash flows are assumed to be equal to the long-term growth rate in the gross domestic product of the
country in which the CGU’s operations are undertaken and were in the range of 1.3% (2013: 1.8%) to 5.1% (2013: 5.8%) reflecting the specific
rates for each territory.
Discount rate
The Group uses a discount rate based on a local Weighted Average Cost of Capital (“WACC”) for each CGU, applying local government yield bonds
and tax rates to each CGU on a geographical basis. The discount rate applied to a CGU represents a pre-tax rate that reflects the market assessment
of the time value of money at the end of the reporting period and the risks specific to the CGU. The discount rates applied to CGUs were in the range
of 6.03% (2013: 4.4%) to 17.05% (2013: 13.65%), reflecting the specific rates for each territory.
Impairment charge
The Group performed its annual test for impairment, in the fourth quarter of 2014. The recoverable amount exceeded the carrying value for all CGUs
with the exception of Brazil (Americas segment). An impairment of £44.3m was recognised, driven by economic uncertainty in Brazil which is expected
to continue in the future. Management remain confident in the long-term contribution of Brazil to the Group.
Following the impairment, the recoverable amount of the Brazilian CGU is £76.8m. The key assumptions used in the impairment calculation for Brazil
were revenue growth of 11% per annum, long term operating margin of 26%, long term growth of 3.8%, and discount rate of 17.05% (2013: 13.65%).
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Operating assets and liabilities continued
6 Intangible assets continued
Sensitivity analysis
A sensitivity analysis was performed for each of the other CGU’s to determine the headroom on the impairment calculation. Management believes
that no reasonably possible change in any of the above key assumptions would cause the carrying value of any CGU, other than Brazil, to exceed its
recoverable amount.
6.2 Other intangibles
Accounting policy
Intangible assets arising on business combinations are initially held at fair value less accumulated amortisation and impairment losses. The main
intangible assets recognised are brands, technology and customer relationships.
Amortisation is charged to the income statement on a straight-line basis over their estimated useful lives.
The estimated useful lives are as follows:
Brand names
– 3 to 20 years
Technology/In process R&D (“IPR&D”)
– 3 to 7 years
Customer relationships
– 4 to 15 years
Other intangible assets that are acquired by the Group are stated at cost less accumulated amortisation and impairment losses if applicable.
Software assets are amortised on a straight-line basis over their estimated useful lives, which do not exceed seven years.
The carrying value of intangibles is reviewed for impairment whenever events indicate that the carrying value may not be recoverable.
Internally generated software development costs qualify for capitalisation if the Group can demonstrate all of the following:
– The technical feasibility of completing the intangible asset so that it will be available for use or sale, its intention to complete the intangible
asset and use or sell it;
– Its ability to use or sell the intangible asset; how the intangible asset will generate probable future economic benefits;
– The existence of a market or, if it is to be used internally, the usefulness of the intangible asset;
– The availability of adequate technical, financial and other resources to complete the development and to use or sell the intangible asset;
– Its ability to measure reliably the expenditure attributable to the intangible asset during development.
Management have determined that to date, internally generated software has been available for general release concurrent with the establishment of
technological feasibility and, accordingly, development costs have not been capitalised. Costs which are incurred after the general release of internally
generated software or costs which are incurred in order to enhance existing products are expensed in the period in which they are incurred and
included within research and development expense in the financial statements (see note 3.2).
Brands
£m
Technology
£m
Acquired
IPR&D
£m
Cost at 1 October 2013
– Additions
– Acquisition of subsidiaries
– Disposals
– Exchange movement
At 30 September 2014
38.6
0.2
–
–
(2.1)
36.7
Accumulated amortisation at 1 October 2013
20.5
– Charge for the year
– Disposals
– Exchange movement
At 30 September 2014
2.4
–
(1.0)
21.9
88.2
0.5
–
–
(5.4)
83.3
65.1
5.9
–
(3.4)
67.6
Net book amount at 30 September 2014
14.8
15.7
0.4
–
–
–
(0.1)
0.3
0.4
–
–
(0.1)
0.3
–
Internal
IPR&D
£m
5.6
–
–
–
–
5.6
5.6
–
–
–
5.6
–
Computer
software
£m
Customer
relationships
£m
60.3
7.5
–
(0.8)
(2.6)
64.4
20.9
10.0
(0.8)
(1.7)
28.4
108.6
0.1
6.6
(0.2)
(3.5)
111.6
75.7
6.2
–
(1.9)
80.0
Total
£m
301.7
8.3
6.6
(1.0)
(13.7)
301.9
188.2
24.5
(0.8)
(8.1)
203.8
36.0
31.6
98.1
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Acquired
IPR&D
£m
0.4
Internal
IPR&D
£m
5.6
Cost at 1 October 2012
– Additions
– Disposal of subsidiaries
– Disposals
– Exchange movement
At 30 September 2013
Brands
£m
40.5
–
(2.3)
–
0.4
38.6
Accumulated amortisation at 1 October 2012
18.4
– Charge for the year
– Disposals
– Disposal of subsidiaries
– Exchange movement
At 30 September 2013
2.7
–
(0.9)
0.3
20.5
Technology
£m
97.9
–
(10.5)
–
0.8
88.2
64.3
8.6
–
(9.1)
1.3
65.1
Net book amount at 30 September 2013
18.1
23.1
–
–
–
–
0.4
0.4
–
–
–
–
0.4
–
All amortisation charges in the year have been charged through selling and administrative expenses.
7 Property, plant and equipment
Computer
software
£m
Customer
relationships
£m
52.9
9.6
(1.8)
(0.2)
(0.2)
60.3
13.9
9.4
(0.2)
(1.6)
(0.6)
20.9
121.2
–
(13.0)
–
0.4
108.6
76.1
7.8
–
(9.0)
0.8
75.7
Total
£m
318.5
9.6
(27.6)
(0.2)
1.4
301.7
178.7
28.5
(0.2)
(20.6)
1.8
188.2
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5.6
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5.6
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32.9
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This note details the physical assets used by the Group to operate the business and generate revenues and profits. Assets are shown at their
initial purchase price less depreciation, which is an expense that is charged over the useful life of these assets to reflect annual wear and tear.
Accounting policy
Property, plant and equipment are stated at cost less accumulated depreciation and impairment losses. Depreciation on property, plant and
equipment is provided on a straight-line basis down to an asset’s residual value over its useful economic life as follows:
Freehold buildings
– 50 years
Long leasehold buildings and improvements
– over period of lease
Plant and equipment
Motor vehicles
Office equipment
Freehold land is not depreciated.
– 2 to 7 years
– 4 years
– 5 to 7 years
The property, plant and equipment acquired under finance leases are depreciated over the shorter of the asset’s useful life and the lease term.
The carrying value of property, plant and equipment is reviewed for impairment whenever events indicate that the carrying value may not
be recoverable.
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Operating assets and liabilities continued
7 Property, plant and equipment continued
Cost at 1 October 2013
– Additions
– Disposals
– Acquisition of subsidiaries
– Exchange movement
At 30 September 2014
Accumulated depreciation at 1 October 2013
– Charge for the year
– Disposals
– Exchange movement
At 30 September 2014
Land and
buildings
£m
94.1
2.3
(2.8)
–
(1.1)
92.5
15.3
3.0
(2.6)
(0.5)
15.2
Plant and
equipment
£m
141.6
11.6
(8.8)
–
(2.7)
141.7
106.4
11.0
(8.4)
(2.2)
106.8
Motor vehicles
and office
equipment
£m
54.1
5.8
(7.2)
0.2
(3.0)
49.9
39.3
4.0
(5.9)
(2.0)
35.4
Total
£m
289.8
19.7
(18.8)
0.2
(6.8)
284.1
161.0
18.0
(16.9)
(4.7)
157.4
Net book amount at 30 September 2014
77.3
34.9
14.5
126.7
Assets held under finance leases with a net book value of £1.5m (2013: £1.9m) are included in the above table.
Cost at 1 October 2012
– Additions
– Disposals
– Acquisition of subsidiaries
– Disposal of subsidiaries
– Exchange movement
At 30 September 2013
Accumulated depreciation at 1 October 2012
– Charge for the year
– Disposals
– Disposal of subsidiaries
– Exchange movement
At 30 September 2013
Land and
buildings
£m
99.5
1.2
(3.7)
–
(2.8)
(0.1)
94.1
13.8
3.4
(0.9)
(1.0)
–
15.3
Plant and
equipment
£m
141.9
8.9
(5.0)
0.1
(3.9)
(0.4)
141.6
102.5
11.7
(4.3)
(3.5)
–
106.4
Motor vehicles
and office
equipment
£m
55.3
4.0
(3.4)
0.1
(2.5)
0.6
54.1
38.2
4.9
(3.0)
(1.1)
0.3
39.3
Total
£m
296.7
14.1
(12.1)
0.2
(9.2)
0.1
289.8
154.5
20.0
(8.2)
(5.6)
0.3
161.0
Net book amount at 30 September 2013
78.8
35.2
14.8
128.8
Depreciation expenses of £18.0m (2013: £20.0m) have been charged through selling and administrative expenses (note 3.2).
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8 Working capital
This note provides the amounts invested by the Group in working capital balances at the end of the financial year. Working capital is made up of
inventories, trade and other receivables and trade and other payables.
Inventories mainly consist of warehouse stock of Sage products, awaiting shipment to business partners or distributors. Trade and other receivables
are made up of amounts owed to us by customers and amounts that we pay to our suppliers in advance. Trade receivables are shown net of an
allowance for bad and doubtful debts. Our trade and other payables are amounts we owe to our suppliers that have been invoiced to us or accrued
by us. They also include taxes and social security amounts due in relation to our role as an employer.
This note also gives some additional detail on the age and recoverability of our trade receivables, which allows readers to better understand any credit
risk faced by the Group as a part of everyday trading.
8.1 Inventories
Accounting policy
Inventories are stated at the lower of cost and net realisable value after making allowances for slow moving or obsolete items.
Cost includes expenditure incurred in acquiring the inventories and bringing them to their existing location and condition. Cost is calculated using the
first-in-first-out method.
Materials
Finished goods
2014
£m
0.7
1.3
2.0
2013
£m
0.5
1.7
2.2
The Group consumed £12.5m (2013: £14.2m) of inventories, included in cost of sales, during the year. There was no material write down of inventories
during the current or prior year.
8.2 Trade and other receivables
Accounting policy
Trade receivables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method, less provision
for impairment.
A provision for impairment of trade receivables is established when there is objective evidence that the Group will not be able to collect all amounts
due according to the original terms of the receivables.
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Operating assets and liabilities continued
8 Working capital continued
8.2 Trade and other receivables continued
Amounts falling due within one year:
Trade receivables
Less: provision for impairment of receivables
Trade receivables – net
Other receivables
Prepayments and accrued income
2014
£m
311.0
(25.5)
285.5
20.8
15.2
321.5
2013
£m
302.3
(27.7)
274.6
22.8
13.8
311.2
The Group’s credit risk on trade and other receivables is primarily attributable to trade receivables. The Group has no significant concentrations of credit
risk since the risk is spread over a large number of unrelated counterparties. The directors estimate that the carrying value of financial assets within trade
and other receivables approximated their fair value.
The Group considers the credit quality of trade and other receivables by geographical location. The Group considers that the carrying value of the
trade and other receivables that is disclosed below gives a fair presentation of the credit quality of the assets. This is considered to be the case as
there is a low risk of default due to the high number of recurring customers and credit control policies; thus the carrying value is expected to be the final
value received.
Trade and other receivables (excluding prepayments and accrued income) by geographical location:
Europe
Americas
AAMEA
Movements on the Group provision for impairment of trade receivables were as follows:
At 1 October
Disposal of subsidiaries
Increase in provision for receivables impairment
Receivables written-off during the year as uncollectible
Unused amounts reversed
Exchange movement
At 30 September
2014
£m
212.8
70.2
23.3
306.3
2014
£m
27.7
–
6.4
(4.5)
(2.7)
(1.4)
25.5
2013
£m
203.7
72.8
20.9
297.4
2013
£m
30.3
(2.3)
10.0
(6.0)
(3.5)
(0.8)
27.7
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In determining the recoverability of a trade receivable, the Group considers the ageing of each receivable and any change in the circumstances of
the individual receivables. The directors believe that there is no further provision required in excess of the provision for impairment of receivables.
The creation and releases of the provision for impaired receivables have been included in selling and administrative expenses in the income statement.
Amounts charged to the provision are generally written-off when there is no expectation of recovering additional cash.
At 30 September 2014, trade receivables of £29.8m (2013: £33.4m) were either partially or fully impaired.
The ageing of these receivables was as follows:
Not due
Less than six months past due
More than six months past due
Trade receivables which were past their due date but not impaired at 30 September 2014 were £33.7m (2013: £46.3m).
The ageing of these receivables was as follows:
Less than six months past due
More than six months past due
2014
£m
4.7
7.1
18.0
29.8
2014
£m
31.3
2.4
33.7
2013
£m
3.1
7.3
23.0
33.4
2013
£m
41.1
5.2
46.3
The maximum exposure to credit risk at the end of the reporting period is the fair value of each class of receivables mentioned above. The Group held
no collateral as security. The directors estimate that the carrying value of trade receivables approximated their fair value.
8.3 Trade and other payables
Accounting policy
Trade payables are recognised initially at fair value and subsequently measured at amortised cost using the effective interest method.
Trade and other payables can be analysed as follows:
Trade payables
Other tax and social security payable
Other payables
Accruals
2014
£m
41.5
52.9
71.1
131.8
297.3
2013
£m
46.4
63.8
46.5
130.9
287.6
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Operating assets and liabilities continued
9 Post-employment benefits
This note explains the accounting policies governing the Group’s pension schemes, analyses the deficit on the defined benefit pension scheme and
shows how it has been calculated.
The majority of the Group’s employees are members of defined contribution pension schemes; additionally the Group does operate two small
defined benefit schemes in France and Switzerland.
For defined contribution schemes, the Group pays contributions into separate funds on behalf of the employee and has no further obligations to
employees. The risks associated with this type of plan are assumed by the member. Contributions paid by the Group in respect of the current period
are included in the income statement.
The defined benefit scheme is a pension arrangement under which participating members receive a pension benefit at retirement determined by the
scheme rules, salary and length of pensionable service. The income statement charge for the defined benefit scheme is the current/past service cost
and the net interest cost which is the change in the net defined benefit liability that arises from the passage of time. The Group underwrites both
financial and demographic risks associated with this type of plan.
Accounting policy
Obligations under defined contribution schemes are recognised as an operating cost in the income statement as incurred.
The Group also operates a small defined benefit pension scheme in Switzerland and other post-employment benefit schemes in France. The assets
of these schemes are held separately from the assets of the Group. The costs of providing benefits under these schemes are determined using the
projected unit credit actuarial valuation method. Under French legislation, the Group is required to make one-off payments to employees in France
who reach retirement age while still in employment.
The current service cost and gains and losses on settlements and curtailments are included in selling and administrative expenses in the income
statement. Past service costs should be recognised on the earlier of the date of the plan amendment and the date the Group recognises
restructuring-related costs. Interest on the net defined benefit liability and the imputed interest on pension plan liabilities comprise the pension
element of the net finance cost/income in the income statement.
Changes in the post-employment benefit obligation due to experience and changes in actuarial assumptions are included in the statement
of comprehensive income in full in the period in which they arise.
The liability recognised in the balance sheet in respect of the defined benefit pension scheme is the present value of the defined benefit obligation
and unrecognised past service cost and future administration costs at the end of the reporting period, less the fair value of plan assets. The defined
benefit obligation is calculated annually by independent actuaries. The present value of the defined benefit obligation is determined by discounting the
estimated future cash outflows using interest rates of high-quality corporate bonds that are denominated in the currency in which the benefits will be
paid and that have terms to maturity approximate to the terms of the related pension liability.
The calculation of the defined benefit obligation of a defined benefit plan requires estimation of future events, for example salary and pension
increases, inflation and mortality rates. In the event that future experience does not bear out the estimates made in previous years, an adjustment will
be made to the plan’s defined benefit obligation in future periods which could have a material effect on the Group.
The Group adopted IAS 19 (revised), “Employee benefits”, in the year. The impact of this is not material to the Group so restated results have not
been prepared.
Pension costs included in the Consolidated income statement
Defined contribution schemes
Defined benefit plans
Note
3.3
2014
£m
9.0
2.0
11.0
2013
£m
9.2
2.2
11.4
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Defined benefit plans
The most recent actuarial valuations of the post-employment benefit plans were performed by Ernst & Young in October 2014.
Weighted average principal assumptions made by the actuaries
Rate of increase in pensionable salaries
Rate of increase in pensions in payment and deferred pensions
Discount rate
Inflation assumption
Mortality rate assumptions made by the actuaries
Average life expectancy for 65-year-old male
Average life expectancy for 65-year-old female
Average life expectancy for 45-year-old male
Average life expectancy for 45-year-old female
Amounts recognised in the balance sheet
Present value of funded obligations
Fair value of plan assets
Net liability recognised in the balance sheet
Major categories of plan assets as a percentage of total plan assets
Bonds
Equities
Property
Other
2014
%
2.13
0.00
1.70
2.00
2014
years
22.2
24.5
42.4
45.0
2014
£m
(30.8)
17.2
(13.6)
£m
9.2
4.8
–
3.4
17.4
2013
%
2.90
0.00
2.55
1.55
2013
years
20.8
25.0
32.9
39.2
2013
£m
(30.3)
17.4
(12.9)
2013
%
52.9
27.6
–
19.5
100.0
£m
9.3
4.6
–
3.3
17.2
2014
%
54.1
26.7
–
19.2
100.0
Expected contributions to post-employment benefit plans for the year ending 30 September 2015 are £1.1m (2013: expected contributions year ending
30 September 2014 £1.6m).
Amounts recognised in the income statement
Net interest costs on obligation
Current service cost
Total included within staff costs
The entire cost is included within selling and administrative expenses.
2014
£m
(0.4)
(1.6)
(2.0)
2013
£m
(0.4)
(1.8)
(2.2)
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Operating assets and liabilities continued
9 Post-employment benefits continued
Changes in the present value of the defined benefit obligation
At 1 October
Exchange movement
Disposal
Service cost
Plan participant contributions
Interest cost
Benefits paid
Curtailments
Actuarial (loss)/gain on benefit obligation
At 30 September
Changes in the fair value of plan assets
At 1 October
Exchange movement
Interest income
Employer’s contributions
Plan participant contributions
Disposal
Benefits paid
Actuarial gain on plan assets
At 30 September
Analysis of the movement in the balance sheet liability
At 1 October
Exchange movement
Disposal
Total expense as recognised in the income statement
Benefits paid/curtailments
Contributions paid
Actuarial (loss)/gain
At 30 September
2014
£m
(30.3)
1.8
–
(1.6)
(0.6)
(0.8)
1.3
–
(0.6)
(30.8)
2014
£m
17.4
(1.0)
0.4
0.9
0.6
–
(1.3)
0.2
17.2
2014
£m
(12.9)
0.8
–
(2.0)
–
0.9
(0.4)
(13.6)
2013
£m
(30.8)
(1.8)
2.3
(1.8)
(0.7)
(0.8)
2.2
0.4
0.7
(30.3)
2013
£m
16.5
0.5
0.4
0.9
0.7
(2.0)
–
0.4
17.4
2013
£m
(14.3)
(1.3)
0.3
(2.2)
2.6
0.9
1.1
(12.9)
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History of experience gains and losses
Present value of defined benefit obligation
Fair value of plan assets
Deficit
Experience adjustments on plan liabilities
Experience adjustments on plan assets
2014
£m
(30.8)
17.2
(13.6)
(0.6)
0.2
2013
£m
(30.3)
17.4
(12.9)
0.7
0.4
2012
£m
(30.8)
16.5
(14.3)
0.5
2.1
Cumulative actuarial gains and losses recognised outside profit or loss
At 1 October
Actuarial (loss)/gain recognised in the year (before tax)
At 30 September
10 Deferred income tax
2011
£m
(29.5)
17.8
(11.7)
(1.5)
0.5
2014
£m
(0.2)
(0.4)
(0.6)
2010
£m
(26.2)
14.9
(11.3)
0.1
0.2
2013
£m
(1.3)
1.1
(0.2)
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Deferred income tax is an accounting adjustment to provide for tax that is expected to arise in the future due to differences in accounting and tax
bases. In this note we outline the accounting policies, movements in the year on the deferred tax account and the net deferred tax asset or liability at
the year-end.
A deferred tax asset represents a tax reduction that is expected to arise in a future period.
A deferred tax liability represents taxes which will become payable in a future period as a result of a current or an earlier transaction.
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Accounting policy
Deferred tax liabilities are generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is
probable that taxable profits will be available against which deductible temporary differences can be utilised. Such assets and liabilities are not
recognised if the temporary difference arises from goodwill or from the initial recognition (other than in a business combination) of other assets and
liabilities in a transaction that affects neither the taxable profit nor the accounting profit.
Deferred tax liabilities are recognised for taxable temporary differences arising on investments in subsidiaries, except where the Group is able to
control the reversal of the temporary difference and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax is calculated at the tax rates that are expected to apply in the period when the liability is settled or the asset realised based on tax rates
that have been enacted or substantively enacted at the end of the reporting period.
Tax assets and liabilities are offset when there is a legally enforceable right.
Deferred income tax has been calculated at 20% (2013: 21.0%) in respect of UK companies (being the corporation tax rate at which timing
differences are expected to reverse) and at the prevailing rates for the overseas subsidiaries.
The Finance Act 2013, which was substantively enacted on 17 July 2013, includes legislation reducing the main rate of UK corporation tax to
21% from 1 April 2014 and a further reduction to 20% from 1 April 2015, both of which were substantively enacted during the year, and therefore
have been reflected in the tax balances below.
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Operating assets and liabilities continued
10 Deferred income tax continued
The movement on the deferred tax account is as shown below:
At 1 October
Income statement credit
Disposal/acquisition of subsidiaries
Exchange movement
Other comprehensive income/equity movement in deferred tax
Transfer from current income tax liabilities
At 30 September
2014
£m
(4.4)
7.4
0.3
(0.9)
0.4
–
2.8
2013
£m
(19.5)
13.7
4.8
(2.0)
(1.4)
–
(4.4)
Deferred tax assets have been recognised in respect of tax losses and other temporary differences giving rise to deferred tax assets because it is
probable that these assets will be recovered. These have been included within the “Other” category.
No deferred tax is recognised on the unremitted earnings of overseas subsidiaries. As the earnings are continually reinvested by the Group, no tax is
expected to be payable on them in the foreseeable future.
The movements in deferred tax assets and liabilities (prior to the offsetting of balances within the same jurisdiction as permitted by IAS 12, “Income
Taxes”) during the year are shown below.
Deferred tax assets and liabilities are only offset where there is a legally enforceable right of offset and there is an intention to settle the balances net.
Assets
At 1 October 2013
Income statement credit
Disposal/acquisition of subsidiaries
Reclassification to deferred tax liability
Change in tax rate
Other comprehensive income/equity movement in deferred tax
Exchange movement
At 30 September 2014
Liabilities
At 1 October 2013
Income statement credit
Reclassification from deferred tax asset
Change in tax rate
Exchange movement
Reclassification to other deferred tax
At 30 September 2014
Intangible
assets
£m
(9.0)
(0.2)
–
–
–
–
0.6
(8.6)
(12.3)
3.0
–
–
1.0
4.6
(3.7)
Other
£m
27.7
1.4
0.3
2.9
0.5
0.4
(2.7)
30.5
Total
£m
18.7
1.2
0.3
2.9
0.5
0.4
(2.1)
21.9
(10.8)
(23.1)
3.2
(2.9)
(0.5)
0.2
(4.6)
6.2
(2.9)
(0.5)
1.2
–
(15.4)
(19.1)
Net deferred tax (liability)/asset at 30 September 2014
(12.3)
15.1
2.8
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Assets
At 1 October 2012
Income statement credit
Disposal of subsidiaries
Reclassification to deferred tax liability
Reclassification to other deferred tax
Other comprehensive income/equity movement in deferred tax
Exchange movement
At 30 September 2013
Liabilities
At 1 October 2012
Income statement credit
Disposal of subsidiaries
Reclassification from deferred tax asset
Reclassification to other deferred tax
Exchange movement
Other comprehensive income/equity movement in deferred tax
At 30 September 2013
Intangible
assets
£m
(1.2)
3.2
–
(11.2)
0.2
–
–
(9.0)
(19.9)
3.0
0.4
11.2
(7.8)
0.8
–
(12.3)
Other
£m
11.2
1.5
4.4
14.0
(0.2)
(1.3)
(1.9)
27.7
(9.6)
6.0
–
(14.0)
7.8
(0.9)
(0.1)
(10.8)
Total
£m
10.0
4.7
4.4
2.8
–
(1.3)
(1.9)
18.7
(29.5)
9.0
0.4
(2.8)
–
(0.1)
(0.1)
(23.1)
Net deferred tax (liability)/asset at 30 September 2013
(21.3)
16.9
(4.4)
11 Contingent liabilities
In this note we give details of any contingent liabilities that exist at the year-end. The use of the word ‘contingent’ means that the future obligation to
make a payment is in question or the amount which would have to be paid is uncertain, to the extent that it could not be reliably estimated.
Accounting policy
A contingent liability is a possible obligation that arises from past events whose existence will be confirmed by the occurrence or non-occurrence
of one or more uncertain future events beyond the control of the Group or a present obligation that is not recognised because it is not probable that
an outflow of resources will be required to settle the obligation. A contingent liability also arises in extremely rare cases where there is a liability that
cannot be recognised because it cannot be measured reliably. The Group does not recognise a contingent liability but discloses its existence in the
financial statements.
In the acquisition of subsidiaries by the Group under business combinations, contingent liabilities assumed are measured initially at their fair value at
the acquisition date, irrespective of the extent of any minority interest.
The Group had no contingent liabilities at 30 September 2014 (2013: none). At any given time, in the normal course of business, events may arise,
including litigation, which may require the Group to consider the recognition criteria for contingent liabilities. Having considered all current facts and
circumstances, the Group considers the likelihood of a material outflow of resources to be remote and therefore no amounts are provided or disclosed
in these financial statements.
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Net debt and capital structure
12 Cash flow and net debt
This note analyses our operational cash generation, shows the movement in our net debt in the year, and explains what is included within our cash
balances and borrowings at the year-end.
Cash generated from operations is the starting point of our cash flow statement on page 109. This section outlines the adjustments for any non-cash
accounting items to reconcile our accounting profit for the year to the amount of physical cash we generated from our operations.
Net debt represents the amount of cash held less borrowings, overdrafts and finance lease payments due.
Borrowings are mostly made up of fixed-term external debt which the Group has taken out in order to finance acquisitions in the past.
12.1 Cash flow generated from continuing operations
Reconciliation of profit for the year to cash generated from continuing operations
Profit for the year
Adjustments for:
Income tax
Finance income
Finance expenses
Amortisation of intangible assets
Depreciation of property, plant and equipment
Loss on disposal of non-core products
Loss on disposal of property, plant and equipment
Loss on disposal of intangible assets
Equity-settled share-based transactions
Fair value adjustments and goodwill impairment
Exchange movement
Changes in working capital (excluding effects of acquisitions and disposals of subsidiaries):
– Decrease in inventories
– Increase in trade and other receivables
– Increase in trade and other payables
– Increase in deferred income
Cash generated from continuing operations
12.2 Net debt
Reconciliation of net cash flow to movement in net debt (inclusive of finance leases)
Increase in cash in the year (pre-exchange movements)
Cash outflow from movement in loans, finance leases and cash collected from customers
Change in net debt resulting from cash flows
Acquisitions
Non-cash movements
Exchange movement
Movement in net debt in the year
Net debt at 1 October
Net debt at 30 September
2014
£m
187.7
89.8
(2.1)
23.0
24.5
18.0
–
0.8
–
8.0
44.7
(11.0)
0.1
(20.5)
8.8
10.6
382.4
2014
£m
63.6
(112.8)
(49.2)
–
(0.9)
(2.8)
(52.9)
(384.3)
(437.2)
2013
£m
47.5
116.6
(1.4)
17.8
28.5
20.0
184.6
0.8
0.1
2.9
(8.1)
(3.3)
0.2
(18.7)
20.9
9.0
417.4
2013
£m
31.2
(266.0)
(234.8)
(0.2)
(0.8)
13.0
(222.8)
(161.5)
(384.3)
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Analysis of change in net debt (inclusive of finance leases)
Cash and cash equivalents
Bank overdrafts
Cash, cash equivalents and bank overdrafts
Finance leases due within one year
Loans due within one year
Loans due after more than one year
Finance leases due after more than one year
Cash collected from customers
Total
At
1 October 2013
£m
Cash flow
£m
Non-cash
movements
£m
Exchange
movement
£m
At
30 September
2014
£m
100.8
(17.9)
82.9
(1.1)
(2.1)
(439.9)
(0.7)
(23.4)
(384.3)
46.7
16.9
63.6
1.1
2.1
(99.7)
(0.8)
(15.5)
(49.2)
–
–
–
(1.1)
(120.5)
119.6
1.1
–
(0.9)
(2.9)
0.1
(2.8)
–
(2.9)
4.6
–
(1.7)
(2.8)
144.6
(0.9)
143.7
(1.1)
(123.4)
(415.4)
(0.4)
(40.6)
(437.2)
Included in cash above is £40.6m (2013: £23.4m) relating to cash collected from customers, which the Group is contracted to pay on to another party.
A liability for the same amount is included in trade and other payables on the balance sheet and is classified within net debt above.
12.3 Cash and cash equivalents (excluding bank overdrafts)
Accounting policy
For the purpose of preparation of the Consolidated statement of cash flows and the Consolidated balance sheet, cash and cash equivalents include
cash at bank and in hand and short-term deposits with an original maturity period of three months or less. Bank overdrafts that are an integral part
of a subsidiary’s cash management are included in cash and cash equivalents where they have a legal right of set-off and there is an intention to
settle net, against positive cash balances, otherwise bank overdrafts are classified as borrowings.
Cash at bank and in hand
Cash held on behalf of customers
Short-term bank deposits
2014
£m
103.6
40.6
0.4
144.6
2013
£m
76.2
23.4
1.2
100.8
The Group’s credit risk on cash and cash equivalents is limited because the counterparties are well established banks with high credit ratings.
12.4 Borrowings
Accounting policy
Assets held under finance leases are initially recognised as assets of the Group at their fair value or, if lower, at the present value of the minimum
lease payments, each determined at the inception of the lease. The corresponding liability to the lessor is included in the balance sheet as a finance
lease obligation.
Interest-bearing borrowings are recognised initially at fair value less attributable transaction costs. Subsequent to initial recognition, interest-bearing
borrowings are stated at amortised cost with any difference between cost and redemption value being recognised in the income statement over
the period of borrowing on an effective interest basis.
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Net debt and capital structure continued
12 Cash flow and net debt continued
12.4 Borrowings continued
Current
Bank overdrafts
Finance lease obligations
Unsecured loans
Non-current
US senior loan notes – unsecured
Bank loans – unsecured
Finance lease obligations
2014
£m
0.9
1.1
123.4
125.4
2014
£m
307.4
108.0
0.4
415.8
2013
£m
17.9
1.0
2.1
21.0
2013
£m
430.3
9.6
0.7
440.6
Included in loans above is £538.8m (2013: £442.0m) of unsecured loans (after unamortised issue costs). These borrowings were utilised for
acquisitions and managing the Group’s minimum leverage target of 1x net debt to EBITDA via its share buyback programme.
The Group has US$300.0m (£185.0m, 2013: £185.3m) of US senior loan notes, which were issued into the US private placement market in 2010.
These notes mature US$200.0m (£123.4m, 2013: £123.5m) in 2015, US$50.0m (£30.8m, 2013: £30.9m) in 2016 and US$50.0m (£30.8m, 2013:
£30.9m) in 2017 and carry fixed interest coupons of 4.39%, 4.78% and 5.15% respectively.
A further US$400.0m (£246.8m, 2013: £247.0m) of US senior loan notes were issued into the US private placement market during 2013. These
notes mature US$50.0m (£30.8m, 2013: £30.9m) in 2018, US$150.0m (£92.6m, 2013: £92.6m) in 2020, US$150.0m (£92.6m, 2013: £92.6m)
in 2023 and US$50.0m (£30.8m, 2013: £30.9m) in 2025 and carry fixed interest coupons of 2.60%, 3.08%, 3.71% and 3.86% respectively.
There were £110.5m drawings (2013: £9.6m) under the multi-currency revolving credit facility of £509.8m (2013: £346.2m) expiring on 26 June
2019, which consists both of US$551.0m (£339.9m, 2013: £167.3m) and of €218.0m (£169.9m, 2013: £178.9m) tranches.
In the table above, bank loans and loan notes are stated net of unamortised issue costs of £3.5m (2013: £2.0m). The Group has in the year incurred
total issue costs amounting to £2.6m (2013: £1.3m) in respect of the refinancing of its revolving credit facility renewal. These issue costs were
paid during the year ended 30 September 2014. These costs are allocated to the income statement over the term of the facility using the effective
interest method.
13 Financial instruments
This note shows details of the fair value and carrying value of short and long term borrowings, trade and other payables, trade and other receivables,
short-term bank deposits, cash at bank and in hand and other financial liabilities. These items are all classified as “financial instruments” under
accounting standards. Fair value is the amount for which an asset could be exchanged, or a liability settled, between knowledgeable willing parties
in an arm’s length transaction.
In order to assist users of these financial statements in making an assessment of any risks relating to financial instruments, this note also shows the
ageing of these items and analyses their sensitivity to changes in key inputs, such as interest rates and foreign exchange rates.
Accounting policy
Financial assets and liabilities are recognised in the Group’s balance sheet when the Group becomes party to the contractual provision
of the instrument.
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13.1 Fair values of financial instruments
For the following financial assets and liabilities: long-term borrowings, short-term borrowings, trade and other payables excluding tax and social security,
trade and other receivables excluding prepayments and accrued income, short-term bank deposits, cash at bank and in hand and other financial
liabilities, the carrying amount approximates the fair value of the instrument with the exception of long-term borrowings due to these bearing interest
at fixed rates which are currently higher than floating rates.
The fair value of the long-term 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.
Book value
£m
2014
Fair value
£m
Book value
£m
(415.8)
(418.0)
(440.6)
2013
Fair value
£m
(435.2)
Long-term borrowings
Fair value of other financial assets and financial liabilities
Financial instruments held or issued to finance the Group’s operations:
Short-term borrowings
Trade and other payables excluding other tax and social security
Trade and other receivables excluding prepayments and accrued income
Short-term bank deposits
Cash at bank and in hand
Other financial liabilities
Note
12.4
12.4
8.3
8.2
12.3
12.3
13.4
(125.4)
(244.4)
306.3
0.4
144.2
(60.1)
(125.4)
(244.4)
306.3
0.4
144.2
(60.1)
13.2 Maturity of financial liabilities
The maturity profile of the undiscounted contractual amount of the Group’s financial liabilities at 30 September was as follows:
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(21.0)
(223.8)
297.4
1.2
99.6
(84.2)
Other
financial
liabilities
£m
60.1
–
–
–
Trade
and other
payables
£m
297.3
–
–
–
297.3
60.1
Trade
and other
payables
£m
287.6
–
–
–
287.6
Other
financial
liabilities
£m
30.0
–
54.2
–
84.2
(21.0)
(223.8)
297.4
1.2
99.6
(84.2)
2014
Total
£m
482.8
30.8
172.4
216.1
902.1
2013
Total
£m
338.6
133.8
146.8
216.2
835.4
In less than one year
In more than one year but not more than two years
In more than two years but not more than five years
In more than five years
In less than one year
In more than one year but not more than two years
In more than two years but not more than five years
In more than five years
Borrowings
£m
125.4
30.8
172.4
216.1
544.7
Borrowings
£m
21.0
133.8
92.6
216.2
463.6
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Net debt and capital structure continued
13 Financial instruments continued
13.3 Borrowing facilities
The Group has the following undrawn committed borrowing facilities available at 30 September in respect of which all conditions precedent had been
met at that date:
Expiring in more than two years but not more than five years
2014
£m
399.3
2013
£m
336.6
The facilities have been arranged to help finance the expansion of the Group’s activities. All these facilities incur commitment fees at market rates. In
addition, the Group maintains overdraft and uncommitted facilities to provide short-term flexibility and has also utilised the US private placement market.
13.4 Other financial liabilities
Accounting policy
The Group makes use of contingent contracts for the purchase of its own shares. These derivative contracts are accounted for as equity transactions
and the contracts are not stated at their market values. The present value of the obligation to purchase the shares is recognised in full at the inception
of the contract, even when that obligation is conditional. Any subsequent reduction in the total obligation arising from the early termination of a
contract is credited back to equity at the time of termination.
Where put and call agreements are in place in respect of shares held by a non-controlling interest, the put element is accounted for as a financial
liability. The amount that may become payable under the option on exercise is initially recognised at present value with a corresponding charge
directly to equity. At the end of each period, the valuation of the liability is reassessed with any changes recognised in the income statement.
Current liabilities : Close period share buyback programme
Non-current liabilities: Put and call arrangement to acquire non-controlling interest
Total other financial liabilities
2014
£m
(60.1)
–
(60.1)
2013
£m
(30.0)
(54.2)
(84.2)
The fair value of the close period share buyback programme has been calculated based on the value of the contractual legal agreement with Citigroup
Global Markets Limited, which is also equal to the book value.
The put and call arrangement to acquire the remaining non-controlling interest’s 25% share in Folhamatic in Brazil was settled during 2014 for
consideration of £50.4m, increasing the Group’s ownership of the Brazilian sub-Group to 100%. In the prior year, the liability was estimated at
£55.4m, which was £54.2m after discounting to the present value of the estimated redemption amount. The redemption amount was calculated
based on a multiple of expected EBITDA for the year ending 31 December 2014. Movements on charging the discount of £0.8m (2012: £1.2m)
have been recognised within finance costs.
Opening fair value at 1 October
Consideration paid
Imputed interest recognised in the Consolidated income statement within finance costs
Loss/(gain) on fair value adjustments
Exchange movement
Closing fair value at 30 September
13.5 Sensitivity analysis
Financial instruments affected by market risks include borrowings and deposits.
2014
£m
54.2
(50.4)
0.8
0.4
(5.0)
–
2013
£m
68.3
–
1.2
(13.5)
(1.8)
54.2
The following analysis, required by IFRS 7, “Financial Instruments: Disclosures”, is intended to illustrate the sensitivity to changes in market variables,
being sterling, US Dollar and Euro interest rates, and sterling/US Dollar and sterling/Euro exchange rates.
The sensitivity analysis assumes reasonable movements in foreign exchange and interest rates before the effect of tax. The Group considers
a reasonable interest rate movement in LIBOR to be 1%, based on interest rate history. Similarly, sensitivity to movements in sterling/US Dollar and
sterling/Euro exchange rates of 10% are shown, reflecting changes of reasonable proportion in the context of movement in those currency pairs
over the last year.
Using the above assumptions, the following table shows the illustrative effect on the consolidated income statement and equity.
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Income
(losses)/gains
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Equity
(losses)/gains
£m
Income
(losses)/gains
£m
2013
Equity
(losses)/gains
£m
1% increase in market interest rates
1% decrease in market interest rates
10% strengthening of sterling versus the US Dollar
10% strengthening of sterling versus the Euro
10% weakening of sterling versus the US Dollar
10% weakening of sterling versus the Euro
13.6 The minimum lease payments under finance leases fall due as follows:
(2.5)
2.5
(3.9)
(5.9)
4.3
6.5
(2.5)
2.5
(17.4)
(28.0)
19.2
30.8
In less than one year
In more than one year but not more than five years
Future finance charges on finance leases
Present value of finance lease liabilities
13.7 Hedge accounting
(3.6)
3.6
11.7
(3.1)
(12.9)
3.4
2014
£m
1.1
0.4
1.5
–
1.5
(3.6)
3.6
(9.3)
(23.8)
10.2
26.1
2013
£m
1.1
0.7
1.8
(0.1)
1.7
Accounting policy
The Group operates net investment hedges, using foreign currency borrowings. The portion of the gain or loss on an instrument used to hedge a net
investment in a foreign operation is determined to be an effective hedge and is recognised in other comprehensive income. The ineffective portion is
recognised immediately in profit or loss. On disposal of the net investment, the foreign exchange gains and losses on the hedging instrument are
recycled to the income statement from equity.
14 Equity
This note analyses the movements recorded through shareholders’ equity that are not explained elsewhere in the financial statements, being changes
in the amount which shareholders have invested in the Group.
The Group utilises share award schemes as part of its employee remuneration package. Share option schemes for our employees include The Sage
Group Performance Share Plan for directors and senior executives and The Sage Group Savings-related Share Option Plan (the “SAYE Plan”) for all
qualifying employees. We incur a cost in respect of these schemes in our income statement, which is set out below along with a detailed description
of each scheme and the number of options outstanding.
This note also shows the dividends paid in the year and any dividends that are to be proposed and paid post year-end. Dividends are paid as an
amount per ordinary share held.
Accounting policy
Ordinary shares are classified as equity. Incremental costs directly attributable to the issue of new ordinary shares or options are shown in equity as a
deduction, net of tax, from the proceeds.
Where any Group company purchases the Company’s equity share capital (treasury shares), the consideration paid, including any directly attributable
incremental costs (net of income taxes), is deducted from equity attributable to the owners of the Company until the shares are cancelled or reissued.
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143
Net debt and capital structure continued
14 Equity continued
14.1 Ordinary shares
Issued and fully paid
At 1 October
Proceeds from shares issued
Shares cancelled
Share consolidation
At 30 September
2014
shares
2014
£m
2013
shares
1,114,135,420
11.7
1,329,517,570
1,756,627
–
–
–
–
–
3,792,153
(159,525,800)
(59,648,503)
1,115,892,047
11.7
1,114,135,420
2013
£m
13.3
–
(1.6)
–
11.7
There was a share consolidation on 10 June 2013 following approval by shareholders. The share consolidation replaced every 81 existing ordinary
shares of 1 pence each with 77 new ordinary shares of 14/77 pence each.
Potential issues of ordinary shares
Executive Share Option Scheme
Certain senior executives hold a total of 2,338,990 (2013: 3,492,263) options to subscribe for shares in the Company at prices ranging from 171.0p
to 270.0p under the share option schemes approved by shareholders.
Under the above scheme, 1,247,775 14/77 p ordinary shares were issued during the year for aggregate proceeds of £2.7m.
Performance Share Plan
Under the Group’s Performance Share Plan 5,519,987 (2013: 6,265,091) awards were made during the year.
Restricted Share Plan
The Group’s Restricted Share Plan is a long-term incentive plan used in limited circumstances and usually on a one-off basis. During the year 1,151,427
(2013: nil) awards were made.
Savings-related Share Option Scheme
In addition, 1,532,520 (2013: 757,980) options were granted under the terms of the Savings-related Share Option Scheme.
Under the above scheme, 508,852 14/77 p ordinary shares were issued during the year for aggregate proceeds of £1m.
14.2 Share-based payments
Accounting policy
Equity-settled share-based payments are measured at fair value (excluding the effect of non-market-based vesting conditions) at the date of grant.
The fair value determined at the grant date of the equity-settled share-based payments is expensed on a straight-line basis over the vesting period,
based on the Group’s estimate of the shares that will eventually vest allowing for the effect of non-market-based vesting conditions.
Fair value is measured using the Black-Scholes or the Monte Carlo pricing models. The expected life used in the model has been adjusted, based on
management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
At the end of the reporting period, the entity revises its estimates for the number of options expected to vest. It recognises the impact of the revision
to original estimates, if any, in the income statement, with a corresponding adjustment to equity.
The total charge for the year relating to employee share-based payment plan was £8.0m (2013: £2.9m), all of which related to equity-settled share-
based payment transactions. After deferred tax, the total charge was £7.8m (2013: £3.0m). A reconciliation of share movements for options granted
after 7 November 2002 to which IFRS 2, “Share-based Payment”, is applicable is shown on the following pages.
Executive Share Option Scheme
There have been no grants of executive share options under the 1999 Executive Share Option Scheme (“ESOS”) since June 2008. Long-term incentive
awards are made under The Sage Group plc Performance Share Plan.
The performance targets governing the vesting of options are based on stretching EPS growth measured over a fixed three-year period from the start
of the financial year in which the grant is made. 30% of options will vest at the end of the period if the increase in EPS exceeds the Retail Prices Index
(“RPI”) by 15% (an average of 5% per year) and 100% of those options will vest at that time only if the RPI is exceeded in that period by 27% (an average
of 9% per year). Between those targets, options will vest on a straight-line basis. If those targets are not met at the end of the three-year period, then no
further retesting of the performance criteria will be undertaken and the options will lapse.
Options were valued using the Black-Scholes option-pricing model. The expected volatility is based on historical volatility over the last four years.
The expected life is the average expected period to exercise. The risk free rate of return is the yield on zero-coupon UK government bonds
of a term consistent with the assumed option life.
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A reconciliation of option movements over the year is shown below:
Outstanding at 1 October
Forfeited
Exercised
Outstanding at 30 September
Exercisable at 30 September
Range of exercise prices £
1.71 – 2.70
2014
Weighted
average
exercise
price
£
2.33
2.29
2.20
2.41
2.41
Number
’000s
3,492
(63)
(1,090)
2,339
2,339
Number
’000s
6,818
(132)
(3,194)
3,492
3,492
2013
Weighted
average
exercise
price
£
2.21
2.08
2.08
2.33
2.33
2013
Weighted
average
exercise
price
£
Number
of shares
’000s
Weighted average
remaining life years
Expected Contractual
Weighted
average
exercise
price
£
Number
of shares
’000s
2014
Weighted average
remaining life years
Expected Contractual
2.41
2,339
–
1.4
2.33
3,492
–
2.1
The weighted average share price during the period for options exercised over the year was 387.8p (2013: 344.6p).
The Sage Group Performance Share Plan
Annual grants of performance shares will normally be made to executive directors and senior executives across the Group after the preliminary
declaration of the annual results.
Awards prior to 2013
Annual awards under the Plan are limited to shares worth up to 300% of base salary. In practice, annual grants to executive directors are limited to
shares with a maximum value on award of 210% of base salary except in exceptional circumstances, such as a promotion or recruitment or to reflect
local market practice.
The performance shares are subject to performance conditions on a sliding scale based on EPS. 25% of the award will vest at the end of the
period if the increase in EPS exceeds RPI by 9% (an average of 3% per year); 100% of the award will vest at that time only if RPI is exceeded in that
period by 27% (an average of 9% per year). Between those targets, awards will vest on a straight-line basis, and if those targets are not met there is
no opportunity for re-testing. Awards are then subject to a total shareholder return (TSR) “multiplier” whereby the level of vesting based on EPS
achievement will be adjusted according to TSR performance over the same three-year period compared with a group of international software and
computer services companies.
The comparator group for awards made in 2012 comprised the following companies:
− Adobe Systems
− ARM Holdings
− Blackbaud
− Cap Gemini
− Cegid
− Logica
− Salesforce.com
− Dassault Systèmes
− Micro Focus International
− SAP
− Exact
− Intuit
− Microsoft
− Oracle
− Software AG
If Sage’s TSR is ranked at lower quartile in the group, the multiplier is 0.75. If Sage’s TSR is ranked at median in the group, the multiplier is 1. If Sage’s
TSR is ranked at upper quartile in the group, then the multiplier is 1.5. Straight-line pro-rating applies between 0.75 and 1, and between 1 and 1.5, but
the multiplier cannot be higher or lower than these figures.
Awards from 2013 onwards
The performance shares are subject to both performance conditions and a TSR target. Performance conditions are weighted one third on the
achievement of an EPS target, and one third on the achievement of an organic revenue growth target. The remaining one third is based on a TSR target.
The EPS vesting percentage is based on compound EPS growth. Where compound EPS growth is between 6% and 12%, the EPS vesting percentage
will be calculated on a straight-line pro-rata basis between 6.7% and 26.7%, and where compound EPS growth is between 12% and 15%, the EPS
vesting percentage will be calculated on a straight-line pro-rata basis between 26.7% and 33.3%.
The Sage Group plc | Annual Report & Accounts 2014
145
Net debt and capital structure continued
14 Equity continued
14.2 Share-based payments continued
The organic revenue growth target is based on the Company’s compound annual organic revenue growth. Where growth is between 4% and 8% the
organic revenue growth vesting percentage will be calculated on a straight-line pro-rata basis between 6.7% and 26.7%, and where the Company’s
compound organic revenue growth is between 8% and 10%, the organic revenue growth vesting percentage will be calculated on a straight-line
pro-rata basis between 26.7% and 33.3%. In order for the organic revenue growth target proportion to vest, the EBITA margin in the financial year
ending 30 September 2016 must not be less than that of the EBITA margin for the financial year ending 30 September 2013.
The final third of the award is the performance target relating to TSR which measures share price performance against a designated comparator group.
Where the Company’s TSR is between median and upper quartile, the TSR vesting percentage will be calculated on a straight-line pro-rata basis
between 6.7% and 26.7% and where the Company’s TSR is between upper quartile and upper decile, the TSR vesting percentage will be calculated
on a straight-line pro-rata basis between 26.7% and 33.3%. The TSR vesting percentage may only exceed 26.7% (“Stretch” level) if performance
against either the EPS target or the organic revenue growth target is also at “Stretch” level.
The comparator group for awards in 2014 is the companies comprised in the FTSE 100 Index at the start of the performance period, excluding financial
services and extraction companies.
Awards were valued using the Monte Carlo option-pricing model. Performance conditions were included in the fair value calculations. The fair value per
award granted and the assumptions used in the calculation are as follows:
Grant date
Share price at grant date
Exercise price
Number of employees
Shares under award
Vesting period (years)
Expected volatility
Award life (years)
Expected life (years)
Risk free rate
January
2014
£4.12
£0.00
1
March
2014
£4.20
£0.00
118
March
2014
£4.20
£0.00
145
August
2014
August
2014
September
2014
September
2014
£3.67
£0.00
2
£3.67
£0.00
1
£3.70
£0.00
1
116,873
4,654,084
690,670
30,600
6,352
15,570
3
22%
3
3
3
22%
3
3
3
22%
3
3
3
21%
3
3
3
21%
3
3
3
20%
3
3
£3.70
£0.00
1
5,838
3
20%
3
3
1.10%
1.10%
1.10%
1.19%
1.19%
0.92%
0.92%
Expected dividends expressed as a
dividend yield
Fair value per award
0.00%
£3.491
0.00%
£3.623
0.00%
£4.194
0.00%
£2.970
0.00%
£3.670
0.00%
£2.993
0.00%
£3.698
Grant date
Share price at grant date
Exercise price
Number of employees
Shares under award
Vesting period (years)
Expected volatility
Award life (years)
Expected life (years)
Risk free rate
Expected dividends expressed as a dividend yield
Fair value per award
March
2013
£3.46
£0.00
101
March
2013
£3.46
£0.00
147
June
2013
£3.34
£0.00
1
August
2013
£3.52
£0.00
1
5,248,868
801,480
186,400
23,619
3
23%
3
3
0.26%
0.00%
£2.753
3
23%
3
3
0.26%
0.00%
£3.460
3
23%
3
3
0.59%
0.00%
£2.637
3
22%
3
3
0.66%
0.00%
£2.737
August
2013
£3.52
£0.00
1
4,724
3
22%
3
3
0.66%
0.00%
£3.520
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The expected volatility is based on historical volatility over the last three years. The expected life is the average expected period to exercise.
The risk free rate of return is the yield on zero-coupon UK government bonds of a term consistent with the assumed award life.
A reconciliation of award movements over the year is shown below:
Outstanding at 1 October
Awarded
Forfeited
Exercised
Outstanding at 30 September
Exercisable at 30 September
Range of exercise prices
N/A
2014
Weighted
average
exercise
price
£
–
–
–
–
–
Number
’000s
16,739
5,520
(8,347)
(21)
13,891
–
2013
Weighted
average
exercise
price
£
–
–
–
–
–
–
Number
’000s
19,128
6,265
(8,654)
–
16,739
–
Weighted
average
exercise
price
£
Number
of shares
’000s
2014
Weighted average
remaining life years
Expected Contractual
Weighted
average
exercise
price
£
Number
of shares
’000s
2013
Weighted average
remaining life years
Expected Contractual
–
13,891
1.6
1.6
–
16,739
1.4
1.4
The Sage Group Restricted Share Plan
The Group’s Restricted Share Plan is a long-term incentive plan used in limited circumstances and usually on a one-off basis, under which contingent
share awards are made, usually with specific performance conditions. Executive directors are not permitted to participate in the plan and shares are
purchased in the market to satisfy vesting awards.
Grant date
Share price at grant date
Exercise price
Number of employees
Shares under award
Vesting period (years)
Expected volatility
Award life (years)
Expected life (years)
Risk free rate
Expected dividends expressed as a dividend yield
Fair value per award
December
2013
January
2014
£3.72
£0.00
7
£4.12
£0.00
13
800,881
350,546
2
20%
2
2
3
22%
3
3
0.60%
1.10%
–
–
£3.721
£4.107
Options were valued using the Black-Scholes option-pricing model. The expected volatility is based on historical volatility over the last two or three years,
consistent with the award life. The expected life is the average expected period to exercise. The risk free rate of return is the yield on zero-coupon UK
government bonds of a term consistent with the assumed award life.
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Net debt and capital structure continued
14 Equity continued
14.2 Share-based payments continued
A reconciliation of award movements over the year is shown below:
Outstanding at 1 October
Awarded
Forfeited
Outstanding at 30 September
Exercisable at 30 September
Range of exercise prices
N/A
2014
Weighted
average
exercise
price
£
–
–
–
–
–
Number
’000s
720
1,151
(420)
1,451
–
2013
Weighted
average
exercise
price
£
–
–
–
–
–
Number
’000s
720
–
–
720
–
Weighted
average
exercise
price
£
Number
of shares
’000s
2014
Weighted average
remaining life years
Expected Contractual
Weighted
average
exercise
price
£
Number
of shares
’000s
2013
Weighted average
remaining life years
Expected Contractual
–
1,451
1.9
1.9
–
720
0.4
0.4
The Sage Group Savings-related Share Option Plan (the “SAYE Plan”)
The Group operates an approved savings-related share option scheme for UK employees. The fair value is expensed over the service period of three,
five or seven years on the assumption that 20% of options will lapse over the service period as employees leave the Group.
14.3 Other reserves
At 1 October 2012
Exchange differences on translating foreign operations
Exchange differences recycled to the income statement in respect of the disposal of foreign operations
At 30 September 2013
Exchange differences on translating foreign operations
Purchase of non-controlling interest
At 30 September 2014
Translation
reserve
£m
83.4
28.4
(44.5)
67.3
(39.6)
–
27.7
Merger
reserve
£m
61.1
–
–
61.1
–
–
61.1
Other
reserve
£m
(68.0)
–
–
(68.0)
–
68.0
–
Total
other
reserves
£m
76.5
28.4
(44.5)
60.4
(39.6)
68.0
88.8
Translation reserve
The translation reserve represents the accumulated exchange differences arising since the transition to IFRS from the following sources:
– The impact of the translation of subsidiaries with a functional currency other than sterling; and
– Exchange differences arising on hedging instruments that are designated hedges of a net investment in foreign operations, net of tax
where applicable.
Exchange differences arising prior to the IFRS transition were offset against retained earnings.
Merger reserve
Merger reserve brought forward relates to the merger reserve which was present under UK GAAP and frozen on transition to IFRS.
Other reserve
Other reserve relates to the recognition of a put and call arrangement to acquire the remaining non-controlling interest’s 25% share in Folhamatic.
This was acquired in 2014. See note 13.4.
14.4 Retained earnings
The actuarial loss of £0.4m (2013: gain of £1.1m) is made up of a loss of £0.6m (2013: gain of £0.7m) on post-employment benefits (note 9)
and a gain of £0.2m (2013: gain of £0.4m) on other long-term employee benefits (note 9).
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Treasury shares
Purchase of treasury shares
Shares purchased under the Group’s buyback programme are not cancelled but are retained in issue and represent a deduction from equity attributable
to owners of the parent. During the year the Group purchased 24,206,805 shares (2013: 77,254,057) at a cost of £89.5m (2013: £251.0m) representing
2% of issued share capital. Shares were repurchased at a weighted average price of 369.8p per share; the highest and lowest prices paid for these
shares were 399.0p per share and 312.3p per share respectively.
Close period share buyback programme
The close period buyback programme for £60.1m (2013: £30.0m) relates to the purchase of the Company’s own shares. Citigroup Global Markets
Limited has been appointed to manage the irrevocable buyback programme during the close period which commenced on 1 October 2014 and will run
up until 3 December 2014.
Employee Share Trust
The Group holds treasury shares in a trust which was set up for the benefit of Group employees. The Trust purchases the Company’s shares in the
market or is gifted them by the Company for use in connection with the Group’s share-based payments arrangements. The Trust holds 5,407,155
ordinary shares in the Company (2013: 5,428,407) at a cost of £0.9m (2013: £0.9m) and a nominal value of £56,880 (2013: £54,284).
The Trust originally purchased the shares in 2006, and further shares were acquired by the Trust in 2010 with the cost being reflected in retained
earnings. These shares were acquired by the Trust in the open market using funds provided by the Company. In January 2013 the Company gifted
5,000,000 shares from purchased treasury shares to the Trust.
The costs of funding and administering the scheme are charged to the profit and loss account of the Company in the period to which they relate. The
market value of the shares at 30 September 2014 was £19.8m (2013: £17.9m).
14.5 Dividends
Accounting policy
Dividends are recognised through equity when approved by the Company’s shareholders or on payment, whichever is earlier.
Final dividend paid for the year ended 30 September 2013 of 7.44p per share
(2013: final dividend paid for the year ended 30 September 2012 of 6.67p per share)
Interim dividend paid for the year ended 30 September 2014 of 4.12p per share
(2013: interim dividend paid for the year ended 30 September 2013 of 3.69p per share)
Special dividend paid of 17.1p per share
2014
£m
81.2
45.0
–
126.2
2013
£m
–
79.3
–
42.8
198.7
320.8
In addition, the directors are proposing a final dividend in respect of the financial year ended 30 September 2014 of 8.00p per share which will absorb
an estimated £86.1m of shareholders’ funds. It will be paid on 6 March 2015 to shareholders who are on the register of members on 13 February 2015.
These financial statements do not reflect this dividend payable.
14.6 Non-controlling interest
Non-controlling interests in equity in the Group balance sheet represent the share of net assets of subsidiary undertakings held outside the Group.
The movement in the year comprises the profit attributable to such interests together with movements in respect of corporate transactions and related
exchange differences.
At 1 October
Non-controlling interest’s share of profit of the year
Purchase of non-controlling interest
At 30 September
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£m
(1.0)
0.9
0.1
–
2013
£m
(2.1)
1.1
–
(1.0)
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Other notes
15 Acquisitions and disposals
The following note outlines acquisitions and disposals during the year and the accompanying accounting policies. Each acquisition or disposal during
the year is discussed in detail and the effects on the results of the Group are highlighted.
Accounting policy
The acquisition of subsidiaries is accounted for using the acquisition method. The cost of the acquisition is measured at the aggregate of the fair
values at the date of exchange, of assets given, liabilities incurred or assumed and equity instruments issued by the Group in exchange for control
of the acquiree. The acquiree’s identifiable assets, liabilities and contingent liabilities that meet the conditions for recognition under IFRS 3 (Revised),
“Business Combinations” are recognised at their fair values at the acquisition date.
Any contingent consideration to be transferred by the Group is recognised at fair value at the acquisition date. Subsequent changes to the fair value
of the contingent consideration that is deemed to be an asset or liability is recognised in the income statement. Contingent consideration that is
classified as equity is not re-measured, and its subsequent settlement is accounted for within equity.
Goodwill represents the excess of the consideration transferred, the amount of any non-controlling interest in the acquiree and the acquisition date
fair value of any previous equity interest in the acquiree over the fair value of the Group’s total identifiable net assets acquired. If, after reassessment,
the Group’s interest in the net fair value of the acquiree’s identifiable assets, liabilities and contingent liabilities exceeds the cost of the business
combination, the difference is recognised directly in the Consolidated income statement. Any subsequent adjustment to reflect changes in
consideration arising from contingent consideration amendments is recognised in the Consolidated income statement.
On an acquisition by acquisition basis, the Group recognises any non-controlling interest in the acquiree either at fair value or at the non-controlling
interest’s proportionate share of the acquiree’s net assets.
Acquisition-related items such as legal or professional fees are expensed to the income statement as incurred.
The Group treats transactions with non-controlling interests as transactions with equity owners of the Group. The difference between fair value of
any consideration paid and the relevant shares acquired of the carrying value of net assets of the subsidiary is recorded in equity.
Where the Group enters into put and call arrangements over shares held by a non-controlling interest, the Group continues to recognise the
non-controlling interest until the ownership risks and rewards of those shares transfer to the Group.
15.1 Acquisitions made during the year
Acquisition of Exact
On 15 September 2014 the Group acquired 100% of the share capital of Exact Software Deutschland GmbH (“Exact”), a provider of payroll services and
software, for a cash consideration of £12.8m. As a result of the acquisition the Group expects to become one of the leading providers of payroll software
solutions in Germany.
Other
On 14 August 2014 the Group acquired 100% of the share capital of Sytax Systemas S.A in Brazil for consideration of £0.6m.
Details of net assets acquired and goodwill are as follows:
Summary of acquisitions
Purchase consideration
Cash
Deferred/contingent consideration
Total purchase consideration
Fair value of net identifiable assets
Goodwill
£m
13.4
–
13.4
(5.8)
7.6
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Fair value of acquisitions
Intangible assets
Property, plant and equipment
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Deferred revenue
Total net identifiable assets acquired
Goodwill
Consideration satisfied by:
Cash
Deferred/contingent consideration
Total purchase consideration
The outflow of cash and cash equivalents on the acquisitions is calculated as follows:
Cash consideration
Cash and cash equivalents acquired
Deferred consideration, paid on prior period acquisitions
Net cash outflow in respect of acquisitions
Exact
£m
Other
£m
6.6
0.2
0.5
2.7
(1.5)
(2.7)
5.8
7.0
12.8
–
12.8
12.8
(2.7)
–
10.1
–
–
–
–
–
–
–
0.6
0.6
–
0.6
0.6
–
3.4
4.0
Total
£m
6.6
0.2
0.5
2.7
(1.5)
(2.7)
5.8
7.6
13.4
–
13.4
13.4
(2.7)
3.4
14.1
In addition, the remaining non-controlling interest 25% share in Folhamatic in Brazil was settled during 2014. See note 13.4 for more details.
15.2 Contribution of acquisitions
From the dates of the acquisitions to 30 September 2014, the acquisitions contributed £0.4m to revenue and £0.0m to profit before income tax.
Had these acquisitions occurred at the beginning of the financial year, contribution to Group revenue would have been £9.6m and Group profit before
income tax would have increased by £0.4m.
15.3 Costs relating to business combinations in the year
Costs relating to business combinations in the year of £2.4m (2013: £0.1m) have been included in selling and administrative expenses in the
Consolidated income statement. These acquisition-related items (previously recognised in goodwill prior to IFRS 3 (Revised), “Business Combinations”)
relate to completed transactions and include advisory, legal, accounting, valuation and other professional or consulting services.
15.4 Disposals made during the year
On 11 March 2014, Sage Software India Pvt Ltd (“Sage India”) sold trading assets with a value of less than £0.1m to Greytrix Consulting Private Limited
(“Greytrix”) for consideration of less than £0.1m. As part of this transaction Greytrix became the distributor of Sage products in India. No further
disclosures are presented within these financial statements.
15.5 Acquisitions made after the year-end but before sign off of Annual Report
Acquisition of PayChoice.
On 16 October 2014 the Group acquired PAI Group, Inc. (“PayChoice”), a provider of payroll and HR services to small and medium sized businesses
in North America, for a cash consideration of £75.2m. The acquisition strengthens Sage’s position in the large and growing US payroll market.
The net identifiable assets were recognised at their provisional fair values. The allocation of the consideration is subject to a full purchase price
allocation exercise, which due to the timing of the acquisition has not yet been completed. The residual excess over the net assets acquired has been
provisionally recognised as goodwill. Paychoice’s product portfolio provides easy to use online payroll solutions to small and medium sized businesses,
and strengthens the Sage value proposition to customers with a more robust and comprehensive offering. The combined portfolio provides attractive
growth opportunities, particularly through new customer acqusitions and cross-sell to the combined customer base.
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Other notes continued
15 Acquisitions and disposals continued
15.5 Acquisitions made after the year-end but before sign off of Annual Report continued
Details of net assets acquired and goodwill are as follows:
Summary of acquisitions
Purchase consideration
Cash
Deferred/contingent consideration
Total purchase consideration
Fair value of net identifiable liabilities
Goodwill
Provisional fair value of acquisitions
Property, plant and equipment
Other non-current assets
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Current borrowings
Non-current borrowings
Provisions
Total net identifiable liabilities acquired
Goodwill
Consideration satisfied by:
Cash
Deferred/contingent consideration
Total purchase consideration
The outflow of cash and cash equivalents on the acquisitions is calculated as follows:
Cash consideration
Cash and cash equivalents acquired
Borrowings acquired
Deferred consideration, paid on prior period acquisitions
Net cash outflow in respect of acquisitions
£m
75.2
–
75.2
22.5
97.7
£m
1.0
0.7
1.6
0.9
(3.9)
(2.6)
(19.6)
(0.6)
(22.5)
97.7
75.2
–
75.2
75.2
(0.9)
22.2
–
96.5
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16 Related party transactions
This note discloses any transaction by the Group with related parties, which are classified as companies or individuals who have an interest in the
Group, including joint ventures, associated undertakings, investments and key management personnel.
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. Compensation paid to the
Executive Committee is disclosed in note 3.3.
Supplier transactions occurred during the year between Sage South Africa (Pty) Ltd, one of the Group’s subsidiary companies, and Ivan Epstein,
Chief Executive Officer, AAMEA. These transactions relate to the lease of four properties in which Ivan Epstein has a minority and indirect shareholding.
During the year £3.2m (2013: £1.1m) relating to these transactions was charged through selling and administrative expenses. There were no outstanding
amounts payable for the year ended 2014 (2013: £nil).
Supplier transactions occurred during the year between Sage SP, S.L., one of the Group’s subsidiary companies, and Álvaro Ramírez, Chief Executive
Officer, Europe. These transactions relate to the lease of a property in which Álvaro Ramírez has a minority shareholding. During the year £1.1m (2013:
£0.2m) relating to these transactions was charged through selling and administrative expenses. There were no outstanding amounts payable for the
year ended 2014 (2013: £nil).
These arrangements are subject to independent review using external advisers to ensure all transactions are at arm’s length.
17 Events after the reporting period
Where the Group receives information in the period between 30 September 2014 and the date of the issue of this report about conditions related to
certain events that existed at the year-end, our disclosures are updated in light of the new information.
17.1 Share buyback
On 30 September 2014 the Group appointed Citigroup Global Markets Limited to manage an irrevocable buyback programme during the close period
which commenced on 1 October 2014 and will run up to 3 December 2014. From 1 October 2014 to 27 November 2014, the latest practical date prior
to publication of the Annual Report & Accounts, 3,457,020 ordinary shares of 14/77p each were repurchased through Citigroup Global Markets Limited at
a weighted average price of 363.8p per share. The highest and lowest prices paid for these shares were 390.7p per share and 347.0p per share
respectively. The purchased shares have not been cancelled and are held as treasury shares. The total number of ordinary shares in issue (excluding
shares held as treasury shares) at 27 November 2014 is 1,076,443,965.
17.2 Acquisitions made after the year but before sign off of annual report
See note 15.5.
17.3 Appointment of CEO
Guy Berruyer retired as CEO and Stephen Kelly was appointed as CEO on 5 November 2014.
18 Principal subsidiaries
While we present consolidated results in these financial statements, our structure is such that there are a number of different operating and holding
companies that contribute significantly to the overall result.
Our subsidiaries are located around the world and each contributes to the profits, assets and cash flow of the Group. We have a large number of
subsidiaries and so for practical reasons in this section only the principal subsidiaries are listed in full.
Detailed below is a list of those subsidiaries which in the opinion of the directors principally affect the amount of the profit or the amount of the assets of
the Group. The Group percentage of equity capital and voting rights is 100% for all of these. All of these subsidiaries are engaged in the development,
distribution and support of business management software and related products and services for small and medium sized businesses.
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Other notes continued
Incorporated subsidiaries
Name
Sage (UK) Ltd
Sage Pay Europe Limited
Sage Hibernia Limited
Sage Pay Ireland Limited
Sage SAS
Sage Holding France SAS
Sage Management and Services GmbH
Sage Bäurer GmbH
Sage Schweiz AG
Sage SP, S.L.
Sage Logic Control, S.L.
Sage sp. z.o.o.
Sage Portugal – Software S.A.
Sage Software, Inc.
Sage Payment Solutions, Inc.
IOB Informações Objetivas Publicações Jurídicas Ltda.
Sage Brasil Software S.A.
Sage Software Canada Ltd
Sage South Africa (Pty) Ltd
Micropay Pty Ltd
Handisoft Software Pty Ltd
Sage Business Solutions Pty Ltd
Sage Software Asia Pte Ltd
Sage Software Sdn Bhd
Country of incorporation
Direct or indirect holding
UK
UK
Ireland
Ireland
France
France
Germany
Germany
Switzerland
Spain
Spain
Poland
Portugal
US
US
Brazil
Brazil
Canada
South Africa
Australia
Australia
Australia
Singapore
Malaysia
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Indirect
Direct
Indirect
Indirect
Indirect
Indirect
Indirect
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Contents
Company financial statements
Independent auditors’ report to the members of The Sage Group plc
156
Company financial statements
Our Company financial statements provide a complete
picture of our 2014 position.
Company balance sheet
Company accounting policies
Notes to the Company financial statements
Results for the year
Supplementary notes to the Company financial statements.
1. Dividends
Operating assets and liabilities
2. Fixed assets: investments
3. Cash at bank and in hand
4. Debtors
5. Creditors: amounts falling due within one year
6. Operating lease commitments
7. Capital commitments and contingent liabilities
8. Creditors: amounts falling due in more than one year
Net debt and capital structure
9. Equity
Other notes
10. Related party transactions
11. Post-balance sheet events
158
159
160
161
161
161
162
162
162
162
163
164
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Independent auditors’ report to the members of The Sage Group plc
Report on the parent company financial statements
Our opinion
In our opinion, The Sage Group plc’s parent company financial statements
(the “financial statements”):
Adequacy of accounting records and information and
explanations received
Under the Companies Act 2006 we are required to report to you if,
in our opinion:
– give a true and fair view of the state of the parent company’s affairs as
at 30 September 2014;
– have been properly prepared in accordance with United Kingdom
Generally Accepted Accounting Practice; and
– have been prepared in accordance with the requirements of the
Companies Act 2006.
What we have audited
The Sage Group plc’s financial statements comprise:
– the company balance sheet as at 30 September 2014; and
– the notes to the financial statements, which include a summary of
significant accounting policies and other explanatory information.
The financial reporting framework that has been applied in the
preparation of the financial statements is applicable law and United
Kingdom Accounting Standards (United Kingdom Generally Accepted
Accounting Practice).
Other required reporting
Consistency of other information
Companies Act 2006 opinion
In our opinion, the information given in the Strategic Report and the
Directors’ Report for the financial year for which the financial statements
are prepared is consistent with the financial statements.
ISAs (UK & Ireland) reporting
Under International Standards on Auditing (UK and Ireland)
(“ISAs (UK & Ireland)”) we are required to report to you if, in our opinion,
information in the Annual Report is:
– materially inconsistent with the information in the audited financial
statements; or
– apparently materially incorrect based on, or materially inconsistent
with, our knowledge of the company acquired in the course of
performing our audit; or
– is otherwise misleading.
We have no exceptions to report arising from this responsibility.
– we have not received all the information and explanations we require
for our audit; or
– adequate accounting records have not been kept by the parent
company, or returns adequate for our audit have not been received
from branches not visited by us; or
– the financial statements and the part of the Directors’ Remuneration
Report to be audited are not in agreement with the accounting
records and returns.
We have no exceptions to report arising from this responsibility.
Directors’ remuneration
Directors’ remuneration report – Companies Act 2006 opinion
In our opinion, the part of the Directors’ Remuneration Report to
be audited has been properly prepared in accordance with the
Companies Act 2006.
Other Companies Act 2006 reporting
Under the Companies Act 2006 we are required to report to you if, in our
opinion, certain disclosures of directors’ remuneration specified by law are
not made. We have no exceptions to report arising from this responsibility.
Responsibilities for the financial statements and the audit
Our responsibilities and those of the directors
As explained more fully in the Statement of directors’ responsibilities
set out on page 96, the directors are responsible for the preparation of the
financial statements and for being satisfied that they give a true and
fair view.
Our responsibility is to audit and express an opinion on the financial
statements in accordance with applicable law and ISAs (UK & Ireland).
Those standards require us to comply with the Auditing Practices
Board’s Ethical Standards for Auditors.
This report, including the opinions, has been prepared for and only for the
company’s members as a body in accordance with Chapter 3 of Part 16
of the Companies Act 2006 and for no other purpose. We do not, in giving
these opinions, accept or assume responsibility for any other purpose or
to any other person to whom this report is shown or into whose hands it
may come save where expressly agreed by our prior consent in writing.
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What an audit of financial statements involves
We conducted our audit in accordance with ISAs (UK & Ireland). An
audit involves obtaining evidence about the amounts and disclosures in
the financial statements sufficient to give reasonable assurance that the
financial statements are free from material misstatement, whether caused
by fraud or error. This includes an assessment of:
– whether the accounting policies are appropriate to the parent
company’s circumstances and have been consistently applied and
adequately disclosed;
– the reasonableness of significant accounting estimates made by the
directors; and
– the overall presentation of the financial statements.
We primarily focus our work in these areas by assessing the directors’
judgements against available evidence, forming our own judgements,
and evaluating the disclosures in the financial statements.
We test and examine information, using sampling and other auditing
techniques, to the extent we consider necessary to provide a reasonable
basis for us to draw conclusions. We obtain audit evidence through testing
the effectiveness of controls, substantive procedures or a combination
of both.
In addition, we read all the financial and non-financial information in the
Annual Report and Accounts (the “Annual Report”) to identify material
inconsistencies with the audited financial statements and to identify any
information that is apparently materially incorrect based on, or materially
inconsistent with, the knowledge acquired by us in the course of
performing the audit. If we become aware of any apparent material
misstatements or inconsistencies we consider the implications for
our report.
Other matter
We have reported separately on the group financial statements
of The Sage Group plc for the year ended 30 September 2014.
Charles Bowman (Senior Statutory Auditor)
for and on behalf of PricewaterhouseCoopers LLP
Chartered Accountants and Statutory Auditors
Newcastle upon Tyne
3 December 2014
(a) The maintenance and integrity of The Sage Group plc website is the responsibility
of the directors; the work carried out by the auditors does not involve consideration of
these matters and, accordingly, the auditors accept no responsibility for any changes
that may have occurred to the financial statements since they were initially presented
on the website.
(b) Legislation in the United Kingdom governing the preparation and dissemination
of financial statements may differ from legislation in other jurisdictions.
The Sage Group plc | Annual Report & Accounts 2014
157
Company balance sheet
At 30 September 2014
Prepared using UK Generally Accepted Accounting Practice (“UK GAAP”)
Fixed assets: investments
Current assets
Cash at bank and in hand
Debtors
Creditors: amounts falling due within one year
Trade and other payables
Net current liabilities
Total assets less current liabilities
Creditors: amounts falling due after more than one year
Net assets
Capital and reserves
Called up share capital
Share premium account
Other reserves
Profit and loss account
Total shareholders’ funds
Note
2
2014
£m
2013
£m
3,088.2
3,082.6
3
4
5
8
9.1
9.2
9.2
9.2
0.9
506.2
507.1
4.5
43.0
47.5
(654.3)
(147.2)
(354.4)
(306.9)
2,941.0
2,775.7
(61.6)
2,879.4
(194.0)
2,581.7
11.7
535.9
(87.2)
2,419.0
2,879.4
11.7
532.2
2.2
2,035.6
2,581.7
The financial statements on pages 158 to 164 were approved by the Board of Directors on 3 December 2014 and are signed on their behalf by:
S Hare,
Chief Financial Officer
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Company accounting policies
Company accounting policies
Basis of accounting
These financial statements are prepared on the going concern basis, under the historical cost convention, and in accordance with the Companies Act
2006 and applicable accounting standards in the United Kingdom. A summary of the more important Company accounting policies, which have been
consistently applied, is set out below.
Foreign currencies
Monetary assets and liabilities expressed in foreign currencies are translated into sterling at rates of exchange prevailing at the date of the balance
sheet or at the agreed contractual rate. Transactions in foreign currencies are converted into sterling at the rate prevailing at the dates of the transactions.
All differences on exchange are taken to the profit and loss account.
Investments
Fixed asset investments are stated at cost less provision for any diminution in value.
Parent Company profit and loss account
The amount of profit for the financial year before dividends within the accounts of the parent Company is £538.0m (2013: £2,170.7m). There is no
material difference between the profits and losses as reported above and historical cost profits and losses and there are no other gains or losses in
the year.
No profit and loss account or cash flow statement is presented for the Company as permitted by section 408 of the Companies Act 2006.
Auditors’ remuneration
The audit fees payable in relation to the audit of the financial statements of the Company are £27,000 (2013: £26,000).
Share-based payments
The Company issues equity-settled share-based payments to certain employees. Equity-settled share-based payments are measured at fair value
(excluding the effect of non-market-based vesting conditions) at the date of grant. The fair value determined at the grant date of the equity-settled share-
based payments is expensed on a straight-line basis over the vesting period, based on the Company’s estimate of the shares that will eventually vest
allowing for the effect of non-market-based vesting conditions.
Fair value is measured using the Black-Scholes or the Monte Carlo pricing models. The expected life used in the model has been adjusted based on
management’s best estimate, for the effects of non-transferability, exercise restrictions and behavioural considerations.
The Company also provides certain employees with the ability to purchase the Company’s ordinary shares at a discount to the current market value at
the date of the grant. The Company records an expense, based on its estimate of the discount related to shares expected to vest, on a straight-line
basis over the vesting period.
At the end of each reporting period, the entity revises its estimates for the number of options expected to vest. It recognises the impact of the revision
to original estimates, if any, in the profit and loss account, with a corresponding adjustment to equity.
The proceeds received net of any directly attributable transaction costs are credited to share capital (nominal value) and share premium when the
options are exercised.
Financial instruments and hedge accounting
The accounting policy of the Company for financial instruments and hedge accounting is the same as that shown in the Group accounting policies.
This policy is in accordance with FRS 26, “Financial Instruments: Recognition and Measurement”.
The Sage Group plc | Annual Report & Accounts 2014
159
Results for the year
1 Dividends
Final dividend paid for the year ended 30 September 2013 of 7.44p per share
(2013: final dividend paid for the year ended 30 September 2012 of 6.67p per share)
Interim dividend paid for the year ended 30 September 2014 of 4.12p per share
(2013: interim dividend paid for the year ended 30 September 2013 of 3.69p per share)
Special dividend paid of 17.1p per share
2014
£m
81.2
45.0
126.2
2013
£m
79.3
42.8
198.7
320.8
In addition, the directors are proposing a final dividend in respect of the financial year ended 30 September 2014 of 8.00p per share which will absorb
an estimated £86.1m of shareholders’ funds. It will be paid on 6 March 2015 to shareholders who are on the register of members on 13 February 2015.
These financial statements do not reflect this dividend payable.
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Operating assets and liabilities
2 Fixed assets: investments
Equity interests in subsidiary undertakings are as follows:
Cost
At 1 October 2013
Increase in year
Disposals
At 30 September 2014
Provision for diminution in value
At 1 October 2013
Provision in year
At 30 September 2014
Net book value
At 30 September 2014
At 30 September 2013
£m
3,218.4
5.6
–
3,224.0
135.8
–
135.8
3,088.2
3,082.6
The directors believe that the carrying value of the investments is supported by their underlying net assets.
Principal trading subsidiary undertakings, included in the Group accounts at 30 September 2014, are shown in note 18 of the Group financial
statements. All of these subsidiary undertakings are wholly owned. All subsidiaries are engaged in the development, distribution and support of business
management software and related products and services for small and medium sized businesses.
All operating subsidiaries’ results are included in the consolidated financial statements. The accounting reference date of all subsidiaries is 30 September,
except for Brazilian subsidiaries which have an accounting reference of 31 December due to Brazilian statutory requirements.
3 Cash at bank and in hand
Cash at bank and in hand
4 Debtors
Amounts owed by Group undertakings
Other debtors
2014
£m
0.9
2014
£m
505.9
0.3
506.2
2013
£m
4.5
2013
£m
43.0
–
43.0
The Sage Group plc | Annual Report & Accounts 2014
161
Operating assets and liabilities continued
5 Creditors: amounts falling due within one year
Bank loans and overdrafts
Amounts owed to Group undertakings
Other creditors
Accruals and deferred income
US senior bank loans -unsecured
2014
£m
0.9
465.2
60.1
4.7
123.4
654.3
2013
£m
0.4
317.4
30.0
6.6
–
354.4
Other creditors relate to outstanding liabilities of £60.1m (2013: £30.0m) arising under an irrevocable close period buyback agreement for the purchase
of the Company’s own shares.
6 Operating lease commitments
The Company had no operating lease commitments during the year (2013: £nil).
7 Capital commitments and contingent liabilities
The Company had no capital commitments or contingent liabilities at 30 September 2014 (2013: none).
8 Creditors: amounts falling due in more than one year
In more than two years but not more than five years
US senior loan notes – unsecured
Bank loans – unsecured
2014
£m
61.6
–
61.6
2013
£m
184.4
9.6
194.0
Included in loans above is £185.0m (2013: £184.4m) of unsecured loans (after unamortised issue costs).
The Company has US$300.0m (£185.1m, 2013: £185.3m) of US senior loan notes, which were issued into the US private placement market
in 2010. These notes mature US$200.0m (£123.4m, 2013: £123.5m) in 2015, US$50.0m (£30.8m, 2013: £30.9m) in 2016 and US$50.0m
(£30.8m, 2013: £30.9m) in 2017 and carry interest coupons of 4.39%, 4.78% and 5.15% respectively.
In 2013 there were £9.6m drawings under the multi-currency revolving credit facility of £346.2m expiring on 31 August 2015. In 2014 the multi-currency
revolving credit facility was refinanced in a subsidiary of the parent company (Sage Treasury Company Limited).
In the table above, bank loans and loan notes are stated net of unamortised issue costs of £0.1m (2013: £0.9m). The Company has in the year
written off remaining issue costs amounting to £0.5m in respect of the refinancing of its revolving credit facility in a subsidiary of the parent company.
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Net debt and capital structure
9 Equity
9.1 Called up share capital
Issued and fully paid
At 1 October
Proceeds from shares issued
Share consolidation
Shares cancelled
At 30 September
2014
shares
2014
£m
2013
shares
1,114,135,420
11.7
1,329,517,570
1,756,627
–
–
–
–
–
3,792,153
(59,648,503)
(159,525,800)
1,115,892,047
11.7
1,114,135,420
2013
£m
13.3
–
–
(1.6)
11.7
Share-based payments
The grants and related accounting treatment adopted by the Company under FRS 20, “Share-based Payment”, are identical to those adopted by the
Group under IFRS 2, “Share-based Payment”.
9.2 Reserves
At 1 October 2013
New shares issued
Utilisation of treasury shares
Purchase of treasury shares
Expenses related to purchase of treasury shares
Close period share buyback programme
Profit for the financial year
Dividends paid to owners of the Company
Equity-settled transactions
At 30 September 2014
Treasury
shares
£m
(60.5)
–
0.1
(89.5)
–
–
–
–
–
Merger
reserve
£m
61.1
Capital
redemption
reserve
£m
1.6
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
Total other
reserves
£m
2.2
–
0.1
(89.5)
–
–
–
–
–
Share
premium
account
£m
532.2
3.7
–
–
–
–
–
–
–
Profit
and loss account
£m
Total
£m
2,035.6
2,570.0
–
(0.1)
–
(0.2)
(30.1)
538.0
(126.2)
2.0
3.7
–
(89.5)
(0.2)
(30.1)
538.0
(126.2)
2.0
(149.9)
61.1
1.6
(87.2)
535.9
2,419.0
2,867.7
Treasury shares
Purchase of treasury shares
During the year the Company purchased 24,206,805 shares (2013: 77,254,057) at a cost of £89.5m (2013: £251.0m). Shares were repurchased
at a weighted average price of 369.8p per share; the highest and lowest prices paid for these shares were 399.0p per share and 312.3p per share
respectively. Shares purchased under the Group’s buyback programme are retained in issue until cancelled and represent a deduction from equity
attributable to owners of the parent. During the year no treasury shares were cancelled. At 30 September 2014, 36,065,411 shares were held
as treasury shares, representing 3.2% of issued share capital.
Close period share buyback programme
The close period buyback programme for £60.1m (2013: £30.0m) relates to the purchase of the Company’s own shares. Citigroup Global Markets
Limited has been appointed to manage the irrevocable buyback programme during the close period which commenced on 1 October 2014 and will
run up until 3 December 2014.
Employee Share Trust
The Company holds treasury shares in a trust which was set up for the benefit of Group employees. The Trust purchases the Company’s shares in the
market or is gifted them by the Company for use in connection with the Group’s share-based payments arrangements. The Trust holds 5,407,155
ordinary shares in the Company (2013: 5,428,407) at a cost of £0.9m (2013: £0.9m) and a nominal value of £56,880 (2013: £54,284).
The Trust originally purchased the shares in 2006, and further shares were acquired by the Trust in 2010 with the cost being reflected in retained earnings.
These shares were acquired by the Trust in the open market using funds provided by the Company. In January 2013 the Company gifted 5,000,000 shares
from purchased treasury shares to the Trust.
The costs of funding and administering the scheme are charged to the profit and loss account of the Company in the period to which they relate. The
market value of the shares at 30 September 2014 was £19.8m (2013: £17.9m).
The Sage Group plc | Annual Report & Accounts 2014
163
Other notes
10 Related party transactions
The Company has taken advantage of the exemption available under FRS 8, “Related Party Disclosures”, not to disclose details of transactions with its
wholly owned subsidiary undertakings.
11 Post-balance sheet events
For details refer to note 17 in the Group financial statements.
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The Sage Group plc | Annual Report & Accounts 2014
Shareholder information
Financial calendar
Annual General Meeting
Dividend payments
Final payable – year ended 30 September 2014
Interim payable – period ending 31 March 2015
Results announcements
Interim results – period ending 31 March 2015
Final results – year ending 30 September 2015
3 March 2015
6 March 2015
5 June 2015
6 May 2015
2 December 2015
Shareholder information online
The Sage Group plc’s registrars are able to notify shareholders by e-mail of the availability of an electronic version of shareholder information. Whenever
new shareholder information becomes available, such as The Sage Group plc’s interim and full year results, Equiniti will notify you by e-mail and you will
be able to access, read and print documents at your own convenience.
To take advantage of this service for future communications, please go to www.shareview.co.uk, where full details of the shareholder portfolio service
are provided. When registering for this service, you will need to have your 11 character shareholder reference number to hand, which is shown on your
dividend tax voucher, share certificate or form of proxy.
Should you change your mind at a later date, you may amend your request to receive electronic communication by entering your shareview portfolio
online and amending your preferred method of communication from “e-mail” to “post”. If you wish to continue receiving shareholder information in the
current format, there is no need to take any action.
Advisers
Corporate brokers and financial advisers
Citigroup Global Markets, 33 Canada Square, Canary Wharf,
London, E14 5LB
Solicitors
Allen & Overy LLP, 1 Bishops Square, London, E1 6AD
Principal Bankers
Lloyds Bank plc, 25 Gresham Street, London, EC2V 7HN
Independent auditors
PricewaterhouseCoopers LLP, Chartered Accountants and Statutory
Auditors, 89 Sandyford Road, Newcastle upon Tyne, NE1 8HW
Registrars
Equiniti, Aspect House, Spencer Road, Lancing, West Sussex,
BN99 6DA
www.shareview.co.uk
Tel: 0871 384 2859 (from outside the UK: +44 (0)121 415 7047)
Fax: 0871 384 2100 (from outside the UK: +44 (0)1903 698403)
Calls to this number cost 8p per minute plus network extras. Lines are
open 8.30am to 5.30pm UK time, Monday to Friday.
Information for investors
Information for investors is provided on the internet as part of the Group’s
website which can be found at: www.sage.com/investors.
Investor enquiries
Enquiries can be directed via our website or by contacting our Investor
Relations department:
Murdo Montgomery
Director of Investor Relations
Tel: +44 (0)191 294 4190
Fax: +44 (0)191 294 0002
The Sage Group plc
Registered office:
North Park
Newcastle upon Tyne, NE13 9AA.
Registered in England
Company number 2231246
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The Sage Group plc
North Park
Newcastle upon Tyne
NE13 9AA
United Kingdom
www.sage.com