Sage Group Regulatory News (SGE)

The Sage Group plc unaudited results for the six months ended 31 March 2016

Thursday 5 May 2016

Accelerating performance and transforming the business

Operating performance

‒ Improved organic revenue growth to 6.2% (H1 2015: 5.0%), achieving double digit recurring revenue growth of 10.0% (H1 2015: 8.1%);

‒ Accelerated software subscription growth to 35.3% (H1 2015: 25.4%) in line with planned transition and corresponding decline in SSRS revenue of 6.3% (H1 2015: -2.0%);

‒ Customers embracing closer relationships with a 50% increase in subscription contracts to 842,000 (H1 2015: 561,000);

‒ Strong results in Europe, North America and Africa were balanced by a slower performance in Asia, which benefitted from non-repeating revenues in the prior period;

‒ Progress made on areas targeted for improved performance (Enterprise Europe, Payments North America and Small and Medium Business North America).

1Organic operating profit is stated before non-recurring items (exceptional costs).Unless otherwise stated, all revenue growth measures referred to in the CEO report are stated on the constant exchange organic basis. Refer to Appendix II on page 16 for information on Non-GAAP measures and note 3 of interim financial statements for details of items excluded from underlying operating profit.

2All H1 15 comparatives and growth rates in the Chief Executive Officer's Review and Chief Financial Officer's Review have been stated after the revenue reporting changes described in the FY15 full year results. Refer to notes 1 and 2 of interim financial statements for further details.

Investing for accelerated growth 

‒ Organic operating margin of 25.4% reflects previously communicated first half strategic investment bias in sales and marketing;

‒ Underlying cash conversion remains strong at 111%, supporting free cash flow of £142m and the 8% increase of the interim dividend to 4.80p;

‒ Consistent focus on improving the quality organic growth, superior operating margins, strong free cash flow conversion and progressive dividends;

‒ Reaffirm confidence in achieving full year organic operating margin of at least 27% and delivering at least 6% organic revenue growth

Business transformation

‒ Remain on-track to secure annualised savings of c.£50m from General & Administrative (G&A) functions by the end of FY16 with a target payback of under two years; Actions taken to deliver £17m of annualised G&A savings taken by end of H1, with an associated exceptional cost of £22m at the half year;

‒ Notices served on 46 property leases, which will take locations down to fewer than 100, with 25 exits by end of March 2016;

‒ Continued to strengthen management to accelerate growth, with over a dozen new joiners to the top 100 leadership team.

Technology driving growth

‒ Achieved 17% (H1 2015: 10%) revenue growth for Sage X3, the solution for larger businesses; Highlights include in excess of 60% growth from International; 20% growth in France; and 25% growth in UK & Ireland;

‒ Increased paying subscriptions for Sage One, the cloud solution for small businesses, by 100% year-on-year to 230,000;

‒ Sage 50 Cloud, our market leading accounting solution for small businesses, supported software subscription growth of 31% in Europe and just under 100% in North America.

Stephen Kelly, Chief Executive Officer said: "Sage continues to perform and transform. We made a good start to FY16 with double digit recurring revenue growth as validation that customers are embracing closer subscription relationships. High quality organic revenue growth continued to accelerate H1 over H1.

"In this phase of the transformation, we have been very focussed on improving the capability of our management and creating a culture where customer obsession and innovation becomes a way of life at Sage. Our customers are the entrepreneurs who drive economic growth and prosperity. These entrepreneurs deserve awesome technology that is an enabler to their growth and success. The Sage cloud and partner ecosystem places the customer at the centre to provide a complete business solution from business start-up through scale-up to vibrant enterprise businesses.

"We are pleased with the early progress made and recognise there is still much to do in the transformation. We remain confident in achieving our full year targets of at least 6% organic revenue growth and organic operating margin of 27%."

Enquiries:

An analyst presentation will be held at 8.45am today at the London Stock Exchange plc, 10 Paternoster Square, London, EC4M 7LS. A live webcast of the presentation will be hosted on www.sage.com/investors, dial-in number +44 (0) 203 427 1908, pin code: 7939458. A replay of the call will also be available for two weeks after the event: Tel: +44(0)20 3427 0598, pin code: 7939458#

Rounding

As a result of rounding throughout this document, it is possible that tables may not cast and change percentages may not calculate precisely.

Chief Executive Officer's Review

Operational performance

Sage continues to perform and transform. I want the Sage management team to be known for doing what we say and for providing absolute transparency, identifying what is going well and what areas require greater focus. In 2015, we committed to driving an improvement in three targeted underperforming areas:

Enterprise Europe:

- Following replacement of the entire management team and reorganisation of the sales team structure, Enterprise Europe delivered growth of 5% for H1, reversing decline in the prior year.

- Sage X3 revenue growth of 16% achieved for H1 in Europe, with 25% growth in UK & Ireland and 20% growth in France.

Small & Medium Businesses North America:

- Rate of revenue growth has nearly doubled to 5% for the half.

- Launched Sage 100 Cloud and Sage 300 Cloud in November 2015, from which we are targeting further momentum.

Payments North America:

- Following reorganisation of the sales team and the introduction of new leadership, the business returned to modest growth of 2% versus a flat performance for H1 2015.

- Signed agreements with seven Independent Software Vendors (ISVs) to integrate with their applications and broaden the Sage Payments customer base.

- Launched the Sage Payment Centre in April, embedding integration within our accounting software to accelerate cross-sell.

Overall, we achieved 6% organic revenue growth for the first half, led by recurring revenue growth of 10%. Within recurring revenue, software subscription grew by 35%, with Q2 2016 being the tenth successive quarter delivering double digit year on year growth for this revenue stream. Higher quality software subscription revenue is supported by over 842,000 contracts, up from 561,000 year on year.

Software subscription is being driven by the transition from perpetual license revenues, as outlined at our Capital Markets Day in 2015. Correspondingly, SSRS declined by 6% as expected, comprising software license revenues falling by 18% and Software related services growing by 7%. Processing revenues grew by 7% for the half, which represents a modest uptick in the payments business and strong payroll processing in North America, building on the platform created by the acquisition of Paychoice.

Solid revenue growth of 7% for Europe was complimented by accelerated revenue growth in North America of 6%. The revenue performance for International, which delivered growth of 5%, falls short of our ambitions for the region. Whilst Africa delivered 17% revenue growth, performance was slower in some other geographies, particularly Asia, where the prior half-year comparator included some non-repeating revenue of £3.5m in Malaysia. We have made changes in leadership and priorities in Asia.

Investing for accelerated growth

As indicated at the time of the 2015 full year results, there is a planned strategic investment bias towards the first half of FY16 and the organic operating margin of 25.4% is in line with expectations. Areas of investment included the sales and marketing functions, where for instance we have added net around 180 heads in sales. We remain confident in achieving our full year organic margin guidance of at least 27%, as secured savings are realised during the second half.

Business transformation

Our transformation remains on track and has progressed in both back-office (G&A) functions and sales and marketing functions. We remain confident of securing annualised G&A savings of £50m by the end of FY16. For more details on the financial impact, refer to the Financial Review section of the Chief Financial Officer's Review below.

Technology driving growth

We have driven continued market share momentum with Sage One, where paying subscriptions have grown by 100% over the past 12 months to 230,000. Countries in which Sage One was launched during FY15 also supported growth, with over 10,000 paying subscriptions achieved in Brazil in 12 months. In common with the agile development of all growth products, Sage One updates are available every two weeks.

We are generating significant subscription momentum with the Sage 50 cloud family. Sage 50 cloud products enable users to access their data from multiple locations and on mobile devices. This functionality has encouraged customers onto the latest versions of the product and also helped to drive subscription uptake. Sage 50 subscription units in North America have increased by around 25,000 with a third of these being either new customers or reactivations.

Sage Live was fully launched in February in the UK, via the Customer Business Centre (CBC) for Europe. Whilst it is still early since initial development of Sage Live, we are seeing success with our go to market model, progressing some customers to purchase within hours of first web-hit and going live within days. There are live customers in both North America and the UK with strong pipeline generated by digital marketing efforts. Over 100 new ISV partners have been recruited in last 6 months with 10 already integrated with Sage Live as we expand the Sage Ecosystem.

Accelerated growth from the Sage X3 family has been achieved, with global revenues growing at 17% (H1 2015: 10%). Highlights include greater than 60% growth in the International region which now represents c.17% of X3 global revenues. X3 Cloud was launched in July 2015, offering more choice to customers. We have strengthened our strategic partnership with Fairsail, a leading provider of cloud human capital management (HCM) solutions. Fairsail's product will be made available as an integrated cloud HCM solution for Sage X3 as well as being implemented internally at Sage.

Progress of execution

Progress has been made under the five pillars of our strategy with continued focus for improvement.

Customers for Life

Progress:

- Delivering value for customers via subscription relationships; The number of subscription contracts was increased by 50% over the last 12 months from 561,000 to 842,000;

- Based on interviews with Sage X3 enterprise customers, the research firm Forrester created a Total Economic Impact (TEI) Study, showing that a composite organisation using Sage X3 achieved a 177% return on investment from cost savings over three years and an expected payback period of only five months; 

- Early success in cross-sell of payroll with accounting, achieving a 26% increase in cross-sell of these products for Small & Medium Businesses in South Africa.

Focus:

- Already achieving some limited success, we need to scale up cross-sell campaigns to improve the average number of products held by our customers.

Winning in the Market

Progress:

- Momentum maintained with 100% increase in Sage One subscriptions; In Australia we added over 1,000 units in our peak month since launch; In Brazil we achieved 10,000 subscriptions in the 12 months since launch;

- Partnerships continue to strengthen, for example, strategic partnerships with Apple, Deloitte, Google, PwC and Salesforce;

- Established the digital platform; 10 web domains have been consolidated onto Sage.com; Achieved over 130% more web traffic year on year on Sage.com.

Focus:

- Partnership recruitment and CBC acceleration.

Revolutionise Business

Progress:

- Expanding the Sage ecosystem, by launching Sage marketplace, an online hub to access complimentary partner applications (initially 50); Our dedication to partner collaboration has enabled two ISVs to integrate with Sage One within 24 hours of signing up (Fundbox and SalesSeek).

- Launched Sage Payment Centre in North America, providing seamless payments integration embedded in Sage 50 and Sage 100 accounting solutions.

- Upgraded over 25,000 Sage Instant Accounts customers in the UK onto Sage 50 cloud.

Focus:

- The R&D function is starting to operate on a coordinated basis and we are implementing centres of excellence to fully leverage our talent and resources. We are also expanding our technology labs to accelerate innovative technology creation.

Capacity for Growth

Progress:

- Investment in our digital marketing capability is starting to deliver. Our global media capability has been consolidated with all paid search spending under one account structure replacing over 150 accounts in FY15. Combined with other initiatives such as social media content and demand campaigns, the approach is starting to generate thousands of leads per week.

- We have implemented our own product, Sage X3, in the UK & Ireland, with a further 5 countries planned for deployment in the next 12 months.

Focus:

- Whilst restructuring our back-office functions, we are starting to reshape our go to market functions, including sales, marketing, customer services, professional services and training.

One Sage:

Progress:

- Management capability strengthened with new joiners to the top 100 leadership team;

- Increasing employee engagement through the Sage Foundation, with over 2,500 volunteer days donated by colleagues during the first half;

- Launched a global induction site as we continue to hire top talent in order to harmonise the joiner experience for new staff wherever they join and over 10,000 hours of training were logged through Sage Academy during the period.

- Driving Excellence in Governance, making progress with code of conduct certification and the risk, assurance and control environment.

Focus:

- Integrated business planning for FY17 and cultural change to encourage consistency.

Organisation

Marc Scheipe has been permanently appointed as President of Sage North America having filled the role on an interim basis during a period when performance in North America improved and the target operating model was implemented. Ivan Epstein, the co-founder of Softline, will retire as President of Sage International. He has been instrumental in his various leadership roles for Sage since our acquisition of Softline in 2003 and has overseen a period of sustained growth in our International businesses. Ivan will remain in his current executive role until 30 September 2016. Ivan will then continue as Chairman of the Sage Foundation. 

Summary

Sage continues to perform and transform. We made a good start to FY16 with double digit recurring revenue growth as validation that customers are embracing closer subscription relationships. High quality organic revenue growth continued to accelerate H1 over H1.

In this phase of the transformation, we have been very focussed on improving the capability of our management and creating a culture where customer obsession and innovation becomes a way of life at Sage. Our customers are the entrepreneurs who drive economic growth and prosperity. These entrepreneurs deserve awesome technology that is an enabler to their growth and success. The Sage cloud and partner ecosystem places the customer at the centre to provide a complete business solution from business start-up through scale-up to vibrant enterprise businesses.

We are pleased with the early progress made and recognise there is still much to do in the transformation. We remain confident in achieving our full year targets of at least 6% organic revenue growth and organic operating margin of 27%.

Chief Financial Officer's Review

Group performance

The Group delivered organic revenue growth of 6.2% (H1 2015: 5.0%) and an organic operating profit margin of 25.4% (H1 2015: 26.4%).

The quality of the growth is demonstrated by recurring revenue growing at 10% (H1 2015: 8%) which includes growth of 35% (H1 2015: 25%) for software subscription revenue.

Organic figures neutralise the impact of foreign currency fluctuations and exclude the contribution from current and prior period acquisitions when relevant. A reconciliation of organic operating profit to statutory operating profit is shown on page 12.  All H1 2015 comparatives and growth rates have been stated after the revenue reporting changes described in the FY15 full year results. Refer to notes 1 and 2 of interim financial statements for further details.

Statutory performance has been impacted by movements in key exchange rates during the year, particularly in Europe, South Africa and Brazil. Statutory figures also include the impact of acquisitions and disposals.

Revenue

Operating profit

The organic operating profit margin has reduced during the half, as expected, due to planned investments indicated at the time of the FY15 full year results. The investment is being made in the go to market functions, particularly the sales and marketing functions. We remain confident of our performance in the second half to meet the full year operating margin guidance of at least 27%.

The current year statutory operating profit is stated after exceptional costs incurred relating to business transformation and after the benefit of costs recovered relating to litigation, both of which are excluded from organic profit (net impact is a reduction of £29m in statutory operating profit).

Significant progress has been made in implementing the sequenced transformation outlined at the time of the FY15 results. G&A savings of £17m relating to people and facilities have been secured as at the half year, to be realised fully in future periods. An exceptional charge of £31m has been incurred in H1, of which £22m relates to G&A functions. Business transformation will continue in the second half, costing around £100m cumulatively and including actions to secure the full year target of £50m of annualised G&A savings.

The percentage of revenue spent on G&A remains at around 19% for the half due to the timing difference between securing and realising the savings. Total spending on Research and Development (R&D) remains at around 10% and the vast majority of R&D expenditure remains focussed on Growth products. All R&D expenditure incurred is expensed, in line with our policy.

Revenue mix 

Segmental reporting

Consistent with our FY15 results, we consider the business split into three Strategic regions, Europe, North America and International.

Recurring revenue

The Group has delivered an improvement in organic recurring revenue growth to 10% (H1 2015: 8%). Growth was driven purely by software subscription (35%, H1 2015: 25%), whilst traditional maintenance and support declined by 2% due to the planned transition to subscription.

Organic recurring revenue represents 69% of the Group's total organic revenue (H1 2015: 66%) with the contract renewal rate at 84% (H1 2015: 84%). Subscription initiatives for all growth products are maintaining a long-running strategic shift to higher quality revenue, building on the recurring revenues derived from our maintenance and support contract base. Subscription contracts also typically attract higher renewal rates than stand-alone maintenance and support contracts, currently at c.90%.

Processing revenue

Processing revenue has grown organically by 7% (H1 2015: 1%), which represents a modest uptick in the payments business and a strong result from Sage Payroll Solutions in North America. Growth in payments processing revenues in Europe remained strong at 10% (H1 2015: 8%).

SSRS revenue

Organic SSRS revenue declined during the year by 6% (H1 2015: -2%), due to the planned transition towards subscription relationships. Within SSRS, revenue from perpetual licenses represents less than 9% of Group revenue and demonstrates the continued emphasis on subscription and recurring revenue relationships.

Regional performance - Europe

Revenue in Europe grew organically by 7% (H1 2015: 4%), with organic recurring revenue growth of 9% (H1 2015: 8%). The acceleration in revenue growth was driven by our larger European businesses, whilst the result of rest of Europe was more challenging.

The performance of the products which constituted Enterprise Europe in the prior year has been improved, generating 5% revenue growth, reversing revenue decline in the prior year. The steps taken to reintegrate the management of our Enterprise customers within the country management structure, has enabled a more coherent approach to lead generation.

Organic software subscription revenue growth remained strong, accelerating to 31% (H1 2015: 25%) and driving this revenue stream to 31% (H1 2015: 25%) of total revenue in Europe. A key driver for subscription success across Europe is the Sage 50 cloud family of products. The latest versions of the product enable customers to expose their data to the cloud, enabling multi location access for colleagues and accountants and data access via mobile devices. This feature is a significant enhancement, enabling customers to continue enjoying the rich and familiar functionality of their desktop solution whilst experiencing the power of the cloud.

Organic processing revenue growth of 9% (H1 2015: 8%), primarily relates to our UK payments business, and demonstrates sustained growth in excess of the group average.

Organic SSRS revenue decline of 1% (H1 2015: decline of 9%) reflects an expected decline in license revenues, due to subscription transition, balanced by good growth for training and professional services.

UK & Ireland - continued success with key initiatives

UK & Ireland revenue grew organically by 9% (H1 2015: 6%) to £165m, supported by organic subscription revenue growth of 47% to £50m. This acceleration in software subscription growth reflects that subscription is now the default relationship for growth products. We have driven continued success with the Auto-Enrolment pensions module for Sage 50 Payroll, selling a further 10,000 units during the period. Cloud Sage 50 Accounts also helped to drive significant growth for the UK&I. Over 25,000 customers were upgraded from Sage Instant Accounts to Sage 50 Essentials during the period, which has brought cloud access to thousands of smaller business.

Cloud momentum was also maintained with Sage One, achieving unit growth of 88% to 120,000. The launch of Sage One Start during the period provides a pathway for micro-businesses to use Sage software and then migrate to a fuller solution when required, all in the cloud.

Processing revenue, primarily related to payments, grew organically by 8% to £17m. We are expanding our service offering to existing customers, for instance offering e-invoicing which includes a pay now button in order to help customers to get paid faster for goods and services. Our payments-out service, enabling customers to initiate payments to employees and suppliers from within their accounting solution, is also building in scale since launch in the prior year. Cross-sell of payments remains a top priority.

France - improving growth supported by Enterprise

In France, organic revenue grew by 7% (H1 2015: 2%) to £118m. Subscription momentum continued, with software subscription revenue growing by 16% to £59m for the half.

The i7 upgrade to Sage 100 and Sage Paie (the core payroll product for medium sized businesses in France) continued to drive adoption of subscription relationships. The penetration of the customer bases of each product with the i7 upgrade, only available on subscription, now stands at 68% and 83% for Sage 100 and Sage Paie respectively. The latest version delivers increased functionality and addresses additional legislation concerning the submission of real-time information to the local tax authorities.

For smaller business, the Sage Ciel Flex offering (Sage 50 family), continues to drive subscription adoption. Consistent with our cloud strategy across Europe, around half of the Ciel subscribers are opting for the highest tier of subscription which includes mobile data access.

Overall growth was also supported by improved results for the Enterprise products following targeted actions taken in the prior period, delivering growth of nearly 10%.

Spain - rate of revenue growth increasing

Organic revenue in Spain grew by 6% to £46m (H1 2015: 1%). Cloud for Contaplus (Sage 50 family) supported software subscription growth of more than 50% for this product. Sage Murano, our flagship product for medium sized businesses in Spain grew organic revenues by 13% overall. Over 80% of growth for the cloud version of the product, Murano Online, was driven by new customer acquisition.

Germany - cloud and reengaged partner channel drive growth

In Germany, organic revenue of £46m represents organic growth of 6% (H1 2015: 3%). As with other major European markets, Sage 50 Cloud supported software subscription growth of over 50% in Germany for Sage 50. A renewed focus on the partner channel contributed to over 15% revenue growth for Office Line, our flagship product for medium sized businesses.

Rest of Europe - drag on regional growth rate

In Rest of Europe, growth in Portugal was balanced by more challenging conditions in Switzerland and Poland, with revenue decline dragging the regional result down marginally. Changes in leadership have been made in Switzerland and Poland and we are confident of improving the performance through the second half.

Regional performance - North America

North America delivered organic revenue growth of 6% supported by organic recurring revenue growth of 9% (H1 2015: 7%) and organic processing revenue growth of 6% (H1 2015: -2%). Organic SSRS revenue contracted by 9% (H1 2015: -5%) due to the planned transition to subscription.

Growth accelerated from full year 2015

The improvement of growth for the region has been supported by improved results for accounting, payroll and payments solutions. Consistent with the cloud strategy in Europe, we have driven success with the Sage 50 Cloud throughout the period in Canada and more recently in the US, following launch in February. The availability of our very latest technology on subscription has contributed to triple digit software subscription revenue growth and around 25,000 additional subscription units for Sage 50. In addition to a significant number of migrations from traditional maintenance and support (M&S) to subscription, around one third of the unit growth was driven by new customer acquisition or reactivation.

The performance of our products suited to medium business (SMB products) improved, with revenue growth nearly doubling to 5% for the half. We are targeting a better performance in the second half with the cloud version of our leading business management solutions, Sage 100C and Sage 300C, through increased engagement and support for our partner network.

Processing revenue growth of 6% was driven by a modest uptick in the payments business to 2% growth (H1 2015: Flat) and strong growth from the payroll processing business. Cross-sell of both payroll and payments into the accounts base is a top priority and specific sales teams have been established to target this opportunity and accelerate in H2.

Regional performance - International

Organic revenue growth was below our ambition in the International region at 5% (H1 2015: 16%). Organic recurring revenue growth of 17% (H1 2015: 12%) and processing revenue growth of 12% (H1 2015: 21%) were highlights, balanced by SSRS revenue declining by 19%. The prior year H1 result benefitted from non-repeating revenue in Malaysia, indicated at the time of the H1 2015 results.

The performance of Sage X3 was encouraging for the region, delivering in excess of 60% revenue growth. Africa led the performance, registering success in the oil, gas and mining sector and adding to the partner network.

Africa - double-digit growth performance maintained

Organic revenue of £44m for Africa represents sustained organic growth of 17% (H1 2015: 16%), supported by strong recurring revenue growth of 26% (H1 2015: 17%). Growth is being achieved with both Sage X3 and local growth products. Strong regional leadership is being developed to grow the African business more quickly outside of South Africa.

Brazil - resilient software growth despite tough economic conditions

Organic revenue in Brazil grew by 7% (H1 2015: 7%) to £20m. Double digit revenue growth was maintained in accounting and payroll software, but sales of technical learning materials in the content business were subdued. The focus for Brazil is new customer acquisition and early success has been achieved following the launch of Sage One, which has delivered over 10,000 paying subscriptions as at March 2016.

Australia, Middle East and Asia

In Australia, organic revenue growth of 7% (H1 2015: 5%) to £19m was driven by local growth products. We have also made a good start with Sage One in Australia, adding over 1,000 paying subscriptions in the peak month since launch.

Organic revenue in the Middle East and Asia declined by 29% (H1 2015: growth of 63%) to £10m. The key factor contributing to the decline is the prior year one-off revenue delivered by Malaysia, where a goods and sales tax was introduced in the prior year, driving software uptake and generating £3.5m of non-repeating revenue. Our newly recruited manager for Asia is currently focussed on building pipeline to deliver an improved H2.

Financial review

1Organic adjustments comprise contributions from acquisitions, disposals and products held for sale.

2Impact of retranslating H1 2015 results at H1 2016 average rates.

3Recurring items comprise amortisation of acquired intangible assets, acquisition-related items and fair value adjustments.

4Non-recurring items comprise items that management judge to be one-off or non-operational including business transformation costs.

Revenue

Statutory revenue grew by 4% to £747m, reflecting organic growth, offset by adverse foreign exchange movements experienced during H1. The average exchange rates used to translate the consolidated income statement for the year are set out on page 14.

Operating profit

Organic operating profit increased by 2% to £189m and the organic operating profit margin decreased to 25.4% due to the planned and indicated strategic investment bias towards the first half. We remain confident in our full year organic margin guidance of at least 27%, as identified savings are realised during the second half. Statutory operating profit declined by 15% to £152m due primarily to non-recurring costs related to business transformation.

Progress has been made in implementing the sequenced transformation outlined at the time of the FY15 results. We are undergoing this transition in order to concentrate our resources on delivering for customers with innovative technology and outstanding levels of support. Annualised G&A savings of £17m relating to people and facilities have been secured by the actions taken during the half, to be fully realised in future periods. Within the total exceptional charge of £31m incurred in H1, £22m relates to G&A functions. 46 lease notices have been served thus far, which will reduce total offices to fewer than 100 and create a better office footprint to serve our customers.

Looking forward, we are confident of securing £50m of annualised G&A savings by the end of FY16, to be fully realised in future periods and reinvested in market-facing functions. The total exceptional cost related to business transformation is anticipated to around £100m for the full year, including actions relate to restructuring the G&A functions. The remaining non-G&A exceptional charge relates to restructuring other market-facing functions, in order to align them with our target global operating model. Net spending in sales and marketing functions is projected to increase.

Adjustments between underlying and statutory operating profit

Non-recurring items separated from underlying operating profit of £29m include £31m of non-recurring costs in relation to the Business Transformation, offset by £2m in respect of the recovery of litigation costs shown as non-recurring consistent with the treatment of the associated costs in prior years. Recurring items of £8m represents amortisation of acquisition related intangible assets and other acquisition related charges.

Net finance cost

The statutory net finance cost for the period was £10m (H1 2015: £10m) and the underlying net finance cost was £11m (H1 2015: £11m). The difference between underlying and statutory net finance costs for the period reflects a fair value adjustment to a debt related instrument of £1m (H1 2015: £1m).

Taxation

The statutory income tax expense was £36m (H1 2015: £44m). The effective tax rate on statutory profit before tax was 25% (H1 2015: 26%). The effective tax rate on underlying profit before tax was 27%

(H1 2015: 25%). This increase is due to a number of non-recurring benefits in the prior period.

Earnings per share

Underlying basic earnings per share decreased by 1.5% to 12.09p (H1 2015: 12.28p) due to the higher effective tax rate experienced during the period. Statutory basic earnings per share decreased to 9.88p (H1 2015: 11.65p), which reflects the decrease in statutory operating profit and higher effective tax.

Cash flow and net debt

1 Refer to Appendix II on page 16 for information on Non-GAAP measures.

The Group remains highly cash generative with underlying cash flows from operating activities of £210m, representing strong underlying cash conversion of 111% (H1 2015: 114%).

A total of £93m (H1 2015: £86m) was returned to shareholders through ordinary dividends. Net debt stood at £404m at 31 March 2016 (31 March 2015: £510m), which is equivalent to 1.0 times 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. The Group's current syndicated bank multi-currency Revolving Credit Facility ("RCF"), with a facility level of £555m (US$551m and €218m tranches) expires in June 2019. At 31 March 2016, £110m (H1 2015: £156m) of the RCF was drawn. Higher RCF drawings in the prior year were due to funding the US Paychoice acquisition in October 2014.

Total US Private Placement ("USPP") loan notes outstanding at 31 March 2016 were £519m (US$650m and €85m) (H1 2015: £533m, US$700m and €85m). Approximately £35m (US$50m) of USPP loan notes were repaid in March 2016. This repayment was funded by free cash flow and RCF drawings.

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 underlying and organic figures are as follows:

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. 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 an 8% increase in the interim ordinary dividend per share for the period to 4.80p per share (H1 2015: 4.45p per share).

Appendix I - Key Performance Indicators ("KPIs") and other measures

Appendix II - Non-GAAP measures

Consolidated income statement

For the six months ended 31 March 2016

Consolidated statement of comprehensive income

For the six months ended 31 March 2016

The notes on pages 23 to 36 form an integral part of this condensed consolidated half-yearly report.

Consolidated balance sheet

As at 31 March 2016

Consolidated statement of changes in equity

For the six months ended 31 March 2016

Consolidated statement of cash flows

For the six months ended 31 March 2016

Notes to the financial information

For the six months ended 31 March 2016

1 Group accounting policies

General information

The Sage Group plc ("the Company") and its subsidiaries (together "the Group") is a leading global supplier of business management software to Small & Medium Businesses.

This condensed consolidated half-yearly financial report was approved for issue by the board of directors on 4 May 2016.

The financial information set out above does not constitute the Company's Statutory Accounts. Statutory Accounts for the year ended 30 September 2015 have been delivered to the Registrar of Companies. The auditor's report was unqualified and did not contain statements under section 498 (2), (3) or (4) of the Companies Act 2006.

Whilst the financial information included in this announcement has been computed in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union ("EU"), this announcement does not in itself contain sufficient information to comply with IFRSs. The financial information has been prepared on the basis of the accounting policies and critical accounting estimates and judgements as set out in the Annual Report & Accounts for 2015.

This condensed consolidated half-yearly financial report has been reviewed, not audited.

The Company is a limited liability company incorporated and domiciled in the UK. The address of its registered office is North Park, Newcastle upon Tyne, NE13 9AA. The Company is listed on the London Stock Exchange.

Basis of preparation

The financial information for the six months ended 31 March 2016 has been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, "Interim Financial Reporting" as adopted by the European Union, ("EU"). The condensed consolidated half-yearly financial report should be read in conjunction with the annual financial statements for the year ended 30 September 2015, which have been prepared in accordance with IFRSs as adopted by the EU.

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 information has been prepared on a going concern basis.

Accounting policies

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 30 September 2015 as described in those annual financial statements. During the financial year 30 September 2015 the Group simplified the definition of revenue categories to enable stakeholders to clearly and transparently track performance. This led to a change in revenue recognition policy to certain products.

The most significant change is to separately disclose the revenue from our payments and payroll processing businesses, which is driven by the volume of transactions. In addition a small amount of revenue from software and software related services ("SSRS") and associated discounts, was reclassified to recurring revenue, relating to products which are time-limited and require an on-going active maintenance contract to function as designed. This has had an impact on the phasing of revenue. Consequently the prior period comparative revenue split shown in the segmental note has been revised, along with the associated impact on deferred revenue to align with the revenue recognition policy adopted in the year ended 30 September 2015.

The impact of reclassifying and rephasing of those products moved from SSRS to recurring revenue was to reduce revenue and operating profit by £4.2m in the six months to 31 March 2015. The balance sheet impact of this change has been to increase deferred revenue at 31 March 2015 by £26.6m representing the SSRS revenue being deferred with an associated deferred tax asset of £8.8m. The foreign exchange retranslation impact of this deferral as at 31 March 2015 of £2.4m is taken to other reserves.

During the year ended 30 September 2015, management also considered the accounting for its arrangements with Business Partners who refer customers to the Group, such as Independent Sales Organisations ("ISOs") in the US Payments business, and concluded that payments made to those business partners are better reflected as costs and not as deductions to revenue. This has had the impact of increasing revenue and costs by £22.3m for the six month period ended 31 March 2015.

In addition to this change in the application of the revenue recognition policy, two other changes were made to the presentation of items on the balance sheet at 30 September 2015. Firstly, the presentation of provisions was revised to show them as a separate line item on the face of the balance sheet having previously been included within trade and other payables. The impact of this change within current liabilities in the comparative period at 31 March 2015 is £11.0m and between current and non-current liabilities is £10.9m. Secondly, the presentation of deferred consideration was changed to include the balance within trade and other payables having previously been a separate line item on the balance sheet. The impact of this change in the comparative period is £2.3m.

The impact of the change in the application of the revenue recognition policy in the March 2015 presentation has been disclosed below, along with the impact of the change in the presentation of provisions and deferred consideration.

Adoption of new and revised IFRSs

The following new accounting standards may have a material impact on the Group. They are currently issued but not yet endorsed by the EU and not effective for the Group for the six-month period ended 31 March 2016:

‒ IFRS 15 "Revenue from Contracts with Customers" - effective financial year commencing 1 October 2018

‒ IFRS 16 "Leases" - effective financial year commencing 1 October 2019

The Group in in the process of assessing the impact that the application of these standards will have on the Group's financial statements.

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

Approximately 30% of the company's revenue is generated from sales to partners rather than to end users. The key judgement in accounting for the three principal ways in which our business partners are remunerated is determining whether the business partner is a customer of the Group in respect of the initial product sale. The key criteria in this determination is whether the business partner has paid for and taken on the risks and rewards of ownership of the software product from Sage. An additional area of judgement is the recognition and deferral of revenue on bundled products, for example the sale of a perpetual licence with an annual maintenance and support contract.

The full revenue recognition policy is disclosed in the 30 September 2015 financial statements.

Goodwill impairment

The judgements in relation to goodwill impairment testing relate to two key areas. The first is the ongoing appropriateness of the cash-generating units ("CGUs") for the purpose of impairment testing. The second relates to the assumptions applied in calculating the value in use of the CGUs being tested for impairment.

The carrying value of goodwill and the key assumptions used in performing the annual impairment assessment are disclosed in the 30 September 2015 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. When making this assessment, we utilise our specialist in-house tax knowledge and experience of similar situations elsewhere to confirm these provisions. These judgements also take into consideration specialist tax advice provided by third party advisors on specific items.

Website

This condensed consolidated half-yearly financial report for the six month ended 31 March 2016 can also be found on our website: www.sage.com/investors/investor-downloads 

2 Segment information

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, through the Quarterly Business Reviews chaired by the Chief Executive Officer (CEO) and Chief Financial Officer (CFO). 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.

In May 2015, following the departure of the CEO of Sage Americas there was a change in the reporting segments with the Brazilian business being moved out of the Americas segment. For reporting purposes Brazil was combined with AAMEA, to form the new International segment and the Americas segment was renamed to North America. The 2015 comparatives have been updated to align with the new segmental reporting.

The Group is organised into four operating segments, with Brazil being aggregated with AAMEA with which there are similar economic characteristics to form the International reporting segment. The UK is the home country of the parent. The reporting segments and their main operating territories are as follows:

‒ Europe (France, UK & Ireland including Sagepay, Spain, Germany, Switzerland, Poland and Portugal)

‒ North America (US and Canada)

‒ International (Brazil, 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.

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.

Revenue by segment (Unaudited)

The 2015 comparatives have been restated in line with the changes in accounting policy (see note 1).

Operating profit by segment