Sage Group Regulatory News (SGE)

The Sage Group plc unaudited results for the six months ended 31 March 2020

Wednesday 13 May 2020

Strong first half performance driven by strategic progress

- Continued strong growth in high quality organic recurring revenue of 10.3%

- Organic operating margin of 22.8%, reflecting ongoing investment to accelerate strategic execution

- Strong underlying cash conversion of 127%

- Resilient balance sheet, with c. £1.3bn of cash and available liquidity; net debt to EBITDA ratio of 0.5x

- We remain focused on the longer-term opportunity as we transition customers to subscription and Sage Business Cloud, with the FY20 outlook reflecting the current global economic uncertainties

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

[1] Please see Appendix 1 for guidance of the usage and definitions of the Alternative Performance Measures.

[2] Organic revenue and operating profit for H1 19 is restated to aid comparability with H1 20. The definition of organic measures can be found in Appendix 1 with a full reconciliation of organic, underlying and statutory measures on page 9. Unless otherwise specified, all references to revenue, profit and margins are on an organic basis.

H1 20 Financial Performance

- Organic total revenue increased by 5.7% to £935m, reflecting growth in recurring revenue of 10.3% to £826m, underpinned by software subscription revenue growth of 25.6% to £582m. This was offset by a 19.6% decrease in other revenue (SSRS and processing) to £109m.

- Growth in recurring revenue of 10.3% reflects the continued focus on attracting new customers and migrating existing customers to subscription and Sage Business Cloud, with particular strength in Northern Europe and North America.

- Decrease in other revenue (SSRS and processing) of 19.6% reflects the managed decline in licence sales and de-prioritisation of professional services revenue as the business continues to focus on subscription, together with the additional impact of COVID-19 towards the end of March.

- Organic operating profit of £213m, representing a margin of 22.8% (H1 19: 23.4%), reflects continued investment to accelerate strategic execution, and includes a £13m increased bad debt provision in connection with COVID-19.

- Non-recurring gain of £92m (H1 19: £13m) includes a £141m net gain on business disposals (Sage Pay and the Brazilian business), offset by office relocation and property restructuring charges of £30m (H1 19: £14m) and a £19m charge for the impairment of goodwill in respect of the Asian business.

- Strong underlying cash conversion of 127% (H1 19: 151%) reflects sustained improvements in working capital and the continued transition to recurring revenue, with free cash flow of £227m (H1 19: £257m).

- Resilient balance sheet, with c. £1.3bn of cash and available liquidity (comprising £912m of cash and cash equivalents, and £413m of undrawn facilities), and a net debt to EBITDA ratio of 0.5x as at 31 March 2020.

- Interim dividend up 2.5% to 5.93p, reflecting strong business performance and cash generation in the first half, and in line with policy of maintaining the dividend in real terms.

Progress in strategic execution

Sage's vision is to become a great SaaS company for customers and colleagues alike. Highlights of our strategic progress in the first half include:

- To drive customer success, we've invested in the end-to-end customer experience, through new ways of working, more efficient processes and improved technology. This has enabled us to respond more effectively to the impact of COVID-19 by providing tailored support and advice to our customers.

- To drive colleague success, we've continued to build a customer-centric culture, embedding our values and further investing in colleague development. Strong colleague engagement has been central to Sage's COVID-19 response, both in the transition to homeworking and in continuing to support customers.

- In innovation, Sage Accounting for Professional Users, our small business solution for cloud-native accounts, has been launched in the UK, while the programme to internationalise Intacct is progressing according to plan. We continue to invest in Sage Business Cloud, creating a single digital environment for all our cloud native and cloud connected products.

- Sage announced the acquisition of CakeHR, a cloud native solution that simplifies and automates HR tasks for small businesses, boosting our cloud offering in the small business segment.

- Sage completed the disposals of Sage Pay and the Brazilian business in March 2020, helping to reshape the Group's product portfolio and increase focus on Sage Business Cloud.

Continued focus on strategic execution has resulted in:

- Strong annualised recurring revenue [3] (ARR) growth of 9.8% to £1,693m, reflecting momentum from FY19 and further sequential growth in the first half.

- Recurring revenue now represents 88% of total revenue (H1 19: 85%) with 62% software subscription penetration (H1 19: 52%).

- Future Sage Business Cloud Opportunity (Sage Business Cloud and products with potential to migrate) recurring revenue growth of 12%. Sage Business Cloud penetration [4] of 56% (H1 19: 44%), reflecting continuing progress in the shift towards cloud connected and cloud native solutions.

- Renewal by value [5] increased to 101% (H1 19: 100%), demonstrating the strength of the existing customer base.

[3] Defined as the normalised organic recurring revenue in the last month of the reporting period, adjusted consistently period to period, multiplied by twelve.

[4] Defined as organic recurring revenue from the Sage Business Cloud as a proportion of the organic recurring revenue of the Future Sage Business Cloud Opportunity.

[5] Defined as the closing ARR from customers active at the start of the year, divided by the opening ARR for the year.

COVID-19 update

- With Sage's focus on high quality recurring and subscription-based revenues, and strong liquidity position, the Group has entered the COVID-19 pandemic in a strong operational and financial position.

- Our response to the pandemic has been to ensure the health and wellbeing of our colleagues, to continue serving and supporting our customers and partners, and to remain focused on our SaaS transition strategy.

- We have put in place a range of measures to support our customers and partners, through local online advice hubs and expert customer service, and by working with governments to help our customers directly access the financial support available, facilitating the application process through our software.

- We saw the early impacts of COVID-19 on Other Revenue (SSRS and processing) towards the end of March, as software licence and professional services implementations were affected.

- We have now started to see the broader effects of the sharp economic downturn caused by the pandemic, with some customers deferring purchase decisions, leading to a slowdown in new customer acquisition.

- In April trading, reflecting the above, new customer acquisition was roughly half the level previously expected. We have also seen a slight increase in customer churn.

- In the context of a more challenging growth environment, we are implementing a range of mitigating actions to manage costs and cash in the near-term.

- At this point, Sage does not intend to make any redundancies in response to the economic environment. We also do not intend to furlough any colleagues or make use of government support programmes.

- We will continue to invest for the long term, repositioning the Group strategically and reshaping the portfolio, supported by our resilient balance sheet.

- Despite the near-term uncertainty, we remain confident that we have the right strategy to support our longer-term vision to become a great SaaS company.

Outlook

While the Group has performed well in the first half, it is too early to quantify with confidence the impact of the pandemic on Sage's financial performance for the full year. We continue to expect, as we indicated in our trading update on 6 April, that organic recurring revenue growth will be below the previously guided range of 8% to 9%, and that the decline in other revenue (SSRS and processing) will accelerate significantly in the second half, with an associated impact on margin.

Steve Hare, CEO, said:

"Sage has had a strong first half, sustaining last year's growth momentum as we continue to focus on recurring revenue growth, and making good progress in strategic execution. Our key priority has been the health and wellbeing of our colleagues and our service to customers. I am proud of how colleagues have reacted, and how they have supported each other and our customers. Despite the near-term uncertainties, I believe our continuing investment into Sage Business Cloud, together with our focus on customers, colleagues and innovation, form a strong base for the future performance of Sage."

About Sage

Sage is the global market leader for technology that provides small and medium businesses with the visibility, flexibility and efficiency to manage finances, operations and people. With our partners, Sage is trusted by millions of customers worldwide to deliver the best cloud technology and support. Our years of experience mean that our colleagues and partners understand how to support our customers and communities through the good, and more challenging times. We are here to help, with practical advice, solutions, expertise and insight.

A presentation for investors and analysts will made via webcast and conference call at 8.30am UK time. The webcast can be accessed via www.sage.com/investors. Conference call participants may dial in by calling +44 (0) 20 7192 8000 and using pin code 1479749. A replay of the call will also be available for one week after the event, by calling +44 (0) 333 300 9785 and using pin code 1479749.\

CEO Review

Sage achieved a strong performance in the first half, delivering high quality recurring revenue growth while continuing to migrate existing customers and attract new customers to subscription and the cloud. COVID-19, which started to impact the Group towards the end of March, is a human crisis that is having a profound effect on people and communities around the world. It presents an unprecedented challenge for our customers - small and medium businesses - and for Sage. We are focused on supporting our colleagues and customers through the pandemic, leveraging our strong service culture and capabilities, and building on our reputation as a trusted advisor. We are also continuing to invest for the long term, ensuring that our short-term actions preserve and enhance our capability and capacity to grow in the future. Our strategy to position the Group for longer-term success remains unchanged, and we continue to focus on our three strategic lenses of customer success, colleague success and innovation, in order to drive further progress towards our vision of becoming a great SaaS company for customers and colleagues alike.

H1 20 Results

In H1 20 the Group delivered recurring revenue growth of 10% to £826m with organic total revenue increasing by 6% to £935m. Strong recurring revenue growth is underpinned by software subscription growth of 26% as the business continues to focus on migrating existing customers and attracting new customers to subscription and the cloud.

Recurring revenue growth was driven principally by North America and Northern Europe (UK & Ireland), with strong momentum from FY19 carried forward into the first half. In North America, recurring revenue grew by 12% to £311m, driven by cloud connected solutions and a good performance from Sage Intacct. Northern Europe continued to grow strongly with recurring revenue growth of 13% to £187m benefitting from strong growth in the second half of FY19 as well as new cloud connected contracts added in H1 20. France achieved recurring revenue growth of 4%, driven by growth in cloud connected solutions.

Other revenue (SSRS and processing) decreased by 20% to £109m, reflecting the managed decline in licence sales and de-prioritisation of professional services revenue as the business continues to focus on subscription, together with the additional impact of COVID-19 towards the end of March.

Portfolio View of Revenue

[6] The revenue portfolio breakdown is provided as supplementary information to illustrate the differences in the evolution and composition of key parts of our product portfolio. These portfolios do not represent Operating Segments as defined under IFRS 8.

[7] Revenue from subscription customers using products that are part of Sage's strategic future product portfolio, where that product is based on an originally on-premise offering for which a substantial part of the customer value proposition is now linked to functionality delivered in, or through the cloud.

[8] Revenue from customers using products that are currently part of, or that management currently believe have a clear pathway to, Sage Business Cloud.

[9] Revenue from customers using products for which management does not currently envisage a path to Sage Business Cloud, either because the product addresses a segment outside Sage's core focus, or due to the complexity and expense involved in a migration.

Within the portfolio view of revenue, the Future Sage Business Cloud Opportunity represents products in, or with a clear pathway to, Sage Business Cloud. Management's primary operational focus is to migrate desktop customers and attract new customers to Sage Business Cloud, and, by delivering increased value to these customers, grow their lifetime value.

The Future Sage Business Cloud Opportunity continues to show strong performance, with recurring revenue growth of 12% and total revenue growth of 7%. Cloud native solutions have delivered recurring revenue growth of 31%, with Sage Intacct delivering recurring revenue growth of 31%.

The growth in cloud connected revenue of 46% to £307m reflects momentum from the migration of existing customers predominantly in North America, Northern Europe and France, as well as further growth from existing and new customers. The focus on driving revenue to cloud solutions has resulted in Sage Business Cloud penetration of 56%, up from 44% in the prior year.

The revenue in the Non-Sage Business Cloud portfolio comprises products for which management does not envisage a path to Sage Business Cloud, predominantly because the products address segments outside Sage's core focus. The 2% recurring revenue decline and 4% total revenue decline in the Non-Sage Business Cloud portfolio is in line with expectations and reflects the strategy to focus on solutions with a direct pathway to Sage Business Cloud.

In line with this strategy, the Group completed the disposals of Sage Pay and the Brazilian business in H1 20, whose products were largely within the Non-Sage Business Cloud portfolio.

Strategy - implementing our vision to become a great SaaS company

The Group remains confident in its strategy to transition to subscription and the cloud, as we continue to work towards our vision to become a great SaaS company for customers and colleagues alike.

In order to achieve Sage's vision, the business continues to focus on the strategic lenses of customer success, colleague success and innovation.

Customer Success

Customer success is driven by a customer-centric approach to everything the organisation does, to create enduring subscription relationships and deliver better business outcomes for customers. By proactively solving customer pain points, we are able to forge deeper relationships with our customers, maximise retention and, by building reputation and advocacy, attract new customers to Sage.

During the first half, we continued to invest in the end-to-end customer experience, embedding new ways of working and improving processes to address more effectively the needs of small and medium businesses. This supports our customer success model which has been deployed across our largest geographies, with significant improvements in productivity and customer service levels.

We've rolled out our single CRM system to North America, having completed the rollout to Northern Europe last year, improving the level of customer insight and service efficiency. We have also continued to digitise the customer service function, through web chat, online forums and communities, reducing call waiting times and accelerating the resolution of customer problems.

These investments have enabled Sage to focus on providing support and advice tailored to the specific needs of small and medium businesses in the light of COVID-19, and to do this with all of our colleagues working from home. In each of our major markets, we've established online coronavirus hubs as a source of practical information. We also run webinars and other interactive sessions to give advice to all small and medium businesses, whether customers or not, on how to access government funds.

We're working directly with governments to find new and better ways to support small and medium businesses. In the UK, we've developed a special software module which supports customers when they apply for government funds, automating key parts of the process, and improving customers' productivity and efficiency. To further support our customers, we have undertaken external research and are listening to customer feedback to understand how we can provide bespoke help for those who need it most.

Colleague success

Management is committed to building a culture that fosters collaboration, and open and honest dialogue, where colleagues feel connected to Sage's vision and put customers at the heart of everything they do.

We have continued to focus on our leadership and emerging talent development programmes in the first half, in order to ensure our current and future leaders are well-equipped to succeed, and we've embedded our values and behaviours through our performance review approach and through culture workshops. We've also created an employee value proposition, to be communicated both internally and externally, which clearly sets out the attractions of working for Sage, supporting both recruitment and retention.

Sage Foundation is a core part of our values and also serves to attract and retain talent. All colleagues are encouraged to take up to five days, on a fully paid basis, to support charitable initiatives under Sage Foundation. As a result, colleagues have contributed more than 12,000 volunteering days so far this year, including during a recent "virtual volunteering" initiative aimed at continuing the work of Sage Foundation during lockdown.

We've been agile in our response to COVID-19, with all colleagues smoothly transitioning to homeworking while maintaining a high level of support for our customers. This transition has been effectively managed through a range of focused initiatives including daily and weekly leadership communications, networking groups, e-learning and support for mental wellbeing.

The result of investing in colleague engagement is more invigorated, engaged colleagues, who are better able and more motivated to support the success of Sage's customers. We carry out regular pulse surveys to monitor colleague sentiment, with recent surveys indicating that 93% of Sage colleagues are satisfied with Sage's response to the global pandemic.

The business will continue to focus on colleagues and leaders throughout FY20, supported by a review of our colleague experience, capability and alignment of compensation structures to drive our transition to a SaaS business.

Innovation

Innovation at Sage means developing solutions that deliver real customer value and solve customer problems by doing things differently, using incremental, emerging and experimental innovation.

In order to achieve this, management continues to invest in Sage Business Cloud. The vision for Sage Business Cloud is a digital environment of cloud platforms, applications and services across Accounting and Financials, People & Payroll and Payments & Banking for Sage's existing and new, small and medium-sized customers, supported by a thriving partner marketplace. This also includes providing cloud connected customers with increased value, allowing them to access the Sage Business Cloud network and consume cloud services as they require. Through a combination of common tools, services, design principles, and service commitments, Sage Business Cloud delivers the core brand values of trusted experience, innovative technology, and customer success.

Our innovation programme continued at pace during the first half of FY20:

- The internationalisation of Sage Intacct continued, with promising early progress in the UK and Australia following its launch in those countries last year. South Africa is expected to launch in the second half of this year.

- Sage Intacct Construction, a cloud financial management solution designed to meet the unique needs of construction companies, and an important further part of our migration strategy, was launched in the US.

- Sage Business Cloud Accounting for Professional Users has been developed and soft launched in the UK. This solution will be used to attract new customers, both direct and through accountant referrals, and over time, will be used to offer a migration path for Sage 50 customers that choose to move to a cloud native solution.

- AutoEntry, our data entry automation solution which we acquired at the end of September, has been integrated with key products including Sage 50 and Sage Accounting, leading to rapid growth.

- We launched Sage Business Cloud marketplace in the UK, a platform on which all of our independent software vendors (ISVs) can showcase and promote their Sage Business Cloud-integrated solutions to our customers.

- We acquired CakeHR, a cloud native solution that simplifies and automates HR tasks for small businesses, boosting Sage's cloud offering for small businesses.

- We created Sage AI Labs, a focused team driving the development of Artificial Intelligence and Machine Learning to enhance the capability of our products, including AI-powered outlier detection capabilities enabling customers to spot accounting mistakes and irregularities, and time tracking that uses AI to learn from project-based employees.

In the second half, Sage will continue to invest in the development and availability of Sage Business Cloud solutions, as well as continuing to drive adoption of cloud services amongst customers.

Strategic KPIs

Our strategic KPIs reflect the strategic progress we've made through our focus on customer success, colleague success and innovation, with H1 20 progress as follows:

- Strong ARR growth of 10% to £1,693m, reflecting momentum from FY19 and further sequential growth in the first half.

- Software subscription penetration of 62% (H1 19: 52%) as the business continues to transition existing customers and attract new customers to subscription and the cloud.

- Sage Business Cloud penetration of 56% (H1 19: 44%) as the business continues to focus on core solutions which have a direct pathway to Sage Business Cloud.

- Renewal by value increased to 101% (H1 19: 100%) demonstrating the strength of the existing customer base.

Financial Review

This financial review provides a brief summary of Sage's financial results on an organic basis, before moving to the underlying and statutory performance of the business. Organic measures allow management and investors to understand the like-for-like revenue and margin performance of the continuing business.

Organic Financial Results

In H1 20 Sage delivered organic recurring revenue growth of 10% to £826m and organic total revenue growth of 6% to £935m. Recurring revenue growth, underpinned by a 26% increase in software subscription revenue to £582m, was driven principally by North America and Northern Europe, with strong momentum from FY19 carried forward into the first half of FY20.

Other revenue (SSRS and processing) declined by 20% to £109m, reflecting the managed decline in licence sales and de-prioritisation of professional services revenue as the business continues to focus on subscription. The decline in other revenue accelerated towards the end of March as a result of COVID-19 impacting licence sales and professional services implementations.

The Group increased organic operating profit by 3% to £213m, and achieved an organic operating margin of 22.8% (H1 19: 23.4%). This margin reflects continued investment to accelerate strategic execution, and includes a £13m charge to provide for expected credit losses in connection with COVID-19.

The Group also achieved underlying basic EPS of 13.75p, underlying cash conversion of 127% and free cash flow of £227m.

Statutory and Underlying Financial Results

[10] Revenue and profit measures are defined in Appendix 1.

The Group achieved statutory total revenue of £975m, a 2% increase on the prior year, with underlying growth in North America and Northern Europe partly offset by foreign exchange headwinds in Central & Southern Europe and International. Underlying total revenue, which normalises the comparative period for foreign currency movements, increased by 3%.

Statutory operating profit increased by 38% to £289m, reflecting the non-recurring net gain on the disposal of subsidiaries (Sage Pay and the Brazilian business), together with the underlying performance of the business and other recurring and non-recurring items. Underlying operating profit, which excludes recurring and non-recurring items, grew by 1% to £218m.

Underlying basic EPS of 13.75p was broadly in line with the prior period.

Underlying & Organic Reconciliations to Statutory

[11] Recurring and non-recurring items are detailed in the paragraph below and in note 3 of the financial statements.

[12] Impact of retranslating H1 19 results at H1 20 average rates.

Revenue

The Group achieved statutory and underlying revenue of £975m in H1 20. Underlying revenue in H1 19 of £946m reflects statutory revenue of £957m retranslated at current year exchange rates, resulting in an FX adjustment of £11m.

Organic revenue of £935m (H1 19: £885m) reflects underlying revenue adjusted for £40m of revenue from assets sold during the period (H1 19: £63m), including £17m of revenue from Sage Pay (H1 19: £20m) and £23m from the Brazilian business (H1 19: £24m). Both disposals completed in March 2020. H1 19 organic revenue also includes a £16m revenue adjustment for the disposal of the US payroll processing business in February 2019, and £3m for the disposal of the South African payments business in July 2019. There is a further £2m revenue adjustment to the prior year relating to the acquisition of AutoEntry in September 2019.

Operating profit

The Group achieved a statutory operating profit of £289m in H1 20 (H1 19: £210m). Underlying operating profit of £218m (H1 19: £216m) reflects statutory operating profit adjusted for recurring and non-recurring items. Recurring items of £21m (H1 19: £21m) comprise £15m amortisation of acquisition-related intangibles (H1 19: £15m) and £6m of M&A related charges (H1 19: £6m).

Non-recurring items include a £141m net gain on disposal of subsidiaries (H1 19: £27m gain), comprising a £193m gain on the disposal of Sage Pay and a £52m loss on disposal of the Brazilian business (of which £44m reflects the non-cash reclassification of foreign exchange losses from other comprehensive income to the income statement) [13]. This is offset by a £19m non-cash charge relating to goodwill impairment in respect of our Asia business, costs relating to our property restructuring programme of £6m (H1 19: £14m), and non-cash accelerated depreciation related to the relocation of our North Park office in Newcastle of £24m. H1 19 operating profit also includes a £2m FX adjustment.

Organic operating profit of £213m (H1 19: £207m) reflects underlying operating profit adjusted for operating profit attributable to businesses sold during the period, including £4m from Sage Pay (H1 19: £8m), and £1m from the Brazilian business. The prior year also includes a further £1m adjustment relating to the acquisition of AutoEntry. There were no material adjustments in respect of the other disposals, which were approximately breakeven at an operating profit level. 

[13] The difference between the actual FX loss reclassification and the estimate given in our announcement of 2 March 2020 reflects a revised calculation and the further devaluation of the Brazilian Real between signing and completion.

Organic Revenue Overview

Organic total revenue increased by 6% in H1 20 to £935m. Organic recurring revenue grew by 10% to £826m, underpinned by a 26% increase in software subscription revenue to £582m, reflecting the continued focus on attracting new customers and migrating existing customers to subscription and Sage Business Cloud. The decline in other recurring revenue of 15% to £244m reflects the substitution effect as customers migrate to subscription contracts. Other revenue (SSRS and processing) declined by 20% to £109m, reflecting the managed decline in licence sales and de-prioritisation of professional services as the business continues to focus on its transition to subscription revenue, together with the additional impact of COVID-19 towards the end of March.

In the portfolio view of revenue, the Future Sage Business Cloud Opportunity delivered recurring revenue growth of 12% to £731m and total revenue growth of 7% to £815m, driven by transitioning existing customers and attracting new customers to Sage Business Cloud. In the Non-Sage Business Cloud portfolio, recurring revenue decreased by 2% to £95m, and total revenue decreased by 4% to £120m.

North America

North America delivered recurring revenue growth of 12% to £311m and total revenue growth of 9% to £343m. Subscription penetration is now 59%, up from 55% in the prior year, and Sage Business Cloud penetration is now 70%, up from 64% in the prior year, driven by both cloud connected and cloud native solutions.

The US (excluding Intacct) delivered recurring revenue growth of 7% to £196m, and total revenue growth of 5% to £221m. The US delivered strong growth in the second half of FY19 driven by migrations, and made further progress in the first half of FY20, with three quarters of the Sage 200 base on a cloud connected solution.

Canada has also continued to perform well, growing recurring revenue by 10% to £46m and total revenue by 6% to £49m, with over three-quarters of revenue from the 50 and 200 base now on a cloud connected solution.

Sage Intacct's recurring revenue growth of 31% to £69m reflects continuing strong momentum in North America, driving growth through both existing customers and new customer acquisition.

Northern Europe

Northern Europe (UK & Ireland) delivered recurring revenue growth of 13% to £187m and total revenue growth of 10% to £198m. Subscription penetration is 84%, up from 63% in the prior year, and Sage Business Cloud penetration is now 80%, up from 59% in the prior year.

Strength in recurring revenue continues to reflect success in cloud connected solutions. Revenue on Sage 50 cloud connected has increased significantly, through migrations, new customer acquisition and reactivations, particularly in the second half of FY19. Northern Europe has continued to add Sage 50 cloud connected contracts during the first half of this year. The region now has more than three quarters of its 50 and 200 base on a cloud connected solution.

The early performance of Sage Intacct in the UK since its launch in November 2019 has been encouraging, with better than expected momentum in new contract wins in the first half.

The region saw a decline of 23% in other revenue (SSRS and processing) to £11m, as the business continues to focus on software subscription and the cloud.

Central & Southern Europe

Central and Southern Europe delivered recurring revenue growth of 6% to £250m and total revenue in line with last year at £297m. Subscription penetration is now 52%, up from 43% in the prior year and Sage Business Cloud penetration is 35%, up from 21% in the prior year, largely driven by growth in cloud connected solutions.

France delivered recurring revenue growth of 4% to £120m, driven principally by Sage 50 and Sage 200 cloud connected solutions. The region now has well over half of its 50 and 200 revenue base on a cloud connected solution. Total revenue in France decreased by 1% to £135m.

Central Europe delivered recurring revenue growth of 9% to £68m while total revenue decreased by 1% to £87m. Growth in the region is driven by a combination of local products and cloud connected solutions.

Iberia delivered recurring revenue growth of 8% to £62m, and total revenue growth of 1% to £76m. Growth in recurring revenue has been driven mainly by Sage 50 and Sage 200 cloud connected solutions.

Other revenue (SSRS and processing) in Central and Southern Europe decreased by 24% to £47m, as the business continues to focus on software subscription and the cloud.

International

International delivered recurring revenue growth of 11% to £78m and total revenue growth of 3% to £97m. Subscription penetration is now 62%, up from 56% in the prior year and Sage Business Cloud penetration in the region is 12%, up from 8% in the prior year.

Africa & Middle East, representing around two thirds of the International region's revenue, delivered strong recurring revenue growth of 15% to £53m, driven by local products and cloud native solutions, particularly Sage Accounting. Total revenue in Africa & Middle East grew by 5% to £66m. Sage Intacct is on track to launch in South Africa later this year.

Australia & Asia delivered recurring revenue growth of 2% to £25m and total revenue in line with last year at £31m. Australia delivered recurring revenue growth of 4% to £20m, driven by cloud native solutions. Sage Intacct has made a promising start, having launched in Australia in August 2019.

Operating Profit

The Group achieved organic operating profit of £213m (H1 19: £207m), representing a margin of 22.8% (H1 19: 23.4%). This margin reflects continued investment to accelerate strategic execution, particularly in sales and marketing, and in technology and innovation. It also includes a £13m charge to provide for expected credit losses in connection with COVID-19.

Underlying operating profit was £218m (H1 19: £216m), representing a margin of 22.4% (H1 19: 22.9%). The difference between organic and underlying operating profit reflects the operating profit from assets sold during the first half (Sage Pay and the Brazilian business).

EBITDA was £256m (H1 19: £246m) representing an EBITDA margin of 26.4%. This includes a £12m increase in depreciation due to the adoption of IFRS 16 on 1 October 2019.

Net Finance Cost

The statutory net finance cost for the period was £14m (H1 19: £12m) and the underlying net finance cost was £13m (H1 19: £13m), with minor differences between statutory and underlying net finance costs reflecting FX movements.

Taxation

The underlying tax expense for H1 20 was £55m (H1 19: £53m), resulting in an underlying tax rate of 27% (H1 19: 26%). The statutory income tax expense for H1 20 was £51m (H1 19: £44m), resulting in a statutory tax rate of 19% (H1 19: 22%).

The difference between the underlying and statutory rate in H1 20 primarily reflects a non-taxable accounting net gain on the disposal of subsidiaries (Sage Pay and the Brazilian business), offset by a non-tax-deductible charge relating to the impairment of goodwill in respect of the Asia business and accelerated depreciation relating to the relocation of our North Park office in Newcastle.

Earnings per Share

Underlying basic earnings per share of 13.75p was broadly in line with the prior period (H1 19: 13.78p), reflecting the increase in underlying operating profit, offset by a higher effective tax rate.

Statutory basic earnings per share increased by 45%, primarily due to the change in non-recurring items which principally reflects the £141m net gain on disposal of subsidiaries.

Cash Flow

The Group remains highly cash generative with underlying cash flow from operating activities of £276m (H1 19: £330m), representing an underlying cash conversion of 127% (H1: 151%).

The continued strong cash conversion reflects sustained improvements in working capital and the continued transition towards recurring revenue. Underlying cash conversion decreased compared to the prior period due to higher levels of bonus pay-out in H1 20 compared to H1 19, in respect of the strong business performance achieved during the previous financial year. Underlying cash conversion is expected to trend downwards in the second half.

Free cash flow was £227m (H1 19: £257m), largely reflecting continued strong underlying cash conversion, together with a reduction in non-recurring cash items.

Group net debt was £238m at 31 March 2020 (30 September 2019: £393m), comprising cash and cash equivalents of £912m (30 September 2019: £372m) and total debt of £1,150m (30 September 2019: £765m). The decrease in net debt in the period is mostly attributable to strong free cash flow of £227m and proceeds from the disposal of Sage Pay of £229m, offset by £121m paid in respect of the FY19 final dividend, and a £136m increase in net debt as a result of adopting IFRS 16.

Debt facilities

The Group's debt is sourced from a syndicated multi-currency Revolving Credit Facility ("RCF"), a syndicated Term Loan and US private placements ("USPP"). The Term Loan of £200m was put in place in September 2019 and expires in September 2021. The Group's RCF expires in February 2025 (having been extended by one year in February 2020) with facility levels of £715m (split between US$719m and £135m tranches). At 31 March 2020, £302m (H1 19: £274m) of the multi-currency revolving debt facility was drawn and the Term Loan was fully drawn.

The Group's total USPP loan notes at 31 March 2020 were £519m (US$550m and EUR85m) (H1 19: £497m, US$550m and EUR85m). The USPP loan notes have a range of maturities between May 2020 and May 2025.

Maturities within the next 18 months comprise $150 million (£121 million) of the Group's US private placement loan notes later this month, and the Group's £200 million syndicated Term Loan in September 2021.

Capital allocation

Sage's disciplined approach to capital allocation remains unchanged as a result of COVID-19.

The Group's primary focus remains on organic investment in order to accelerate the execution of the strategy as outlined above.

Sage continues to consider bolt-on acquisitions of complementary technology and partnerships that will further accelerate the strategy and enhance Sage Business Cloud, and has made several small but strategically significant acquisitions in the recent past. In line with focusing on core competences within the business, management continues to evaluate the disposal of certain non-core assets, having completed the disposal of Sage Pay and the Brazilian business in the first half.

Our policy is to maintain the dividend in real terms. In line with our policy, and reflecting the Group's strong business performance and cash generation in the first half, we have increased the interim dividend by 2.5% to 5.93p.

The Group will also consider making additional capital returns to shareholders if appropriate. To support the Group's financial strength in light of the COVID-19 pandemic, Sage announced on 6 April 2020 the cancellation of the previously announced £250m share buy-back programme, after £7m of shares had been purchased.

Group net debt as at 31 March 2020 was £238m and reported EBITDA over the last 12 months was £518m, resulting in a net debt to EBITDA ratio of 0.5x. Group return on capital employed (ROCE) for H1 20 was 20.5% (H1 19 as reported: 20.7%).

The Group adopted IFRS 16 with effect from 1 October 2019, resulting in the recognition on the balance sheet of additional financial liabilities of £136m, which has increased net debt to EBITDA in H1 20 by 0.2x, partially offsetting the year-on-year decrease. The financial results from the prior year have not been restated. The adoption of IFRS 16 has had no material impact on our overall financial result.

Sage plans to operate in a broad range of 1-2x net debt to EBITDA over the medium term, with flexibility to move outside this range as the business needs require. Accordingly, given the current environment, we are comfortable with our current net debt to EBITDA ratio of 0.5x.

Going concern

The Directors have robustly tested the going concern assumption in preparing the financial statements, taking into account the Group's strong liquidity position at 31 March 2020 and a number of downside sensitivities, and remain satisfied that the going concern basis of preparation is appropriate. Further information is provided in note 1 of the financial statements on page 23.

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:

Appendix 1 - Alternative Performance Measures

Alternative Performance measures are used by the company to understand and manage performance. These are not defined under IFRS and are not intended to be a substitute for any IFRS measures of performance but have been included as management considers them to be important measures, alongside the comparable GAAP financial measures, in assessing the underlying performance. Wherever appropriate and practical, we provide reconciliations to relevant GAAP measures. The table below sets out the basis of calculation of the Alternative Performance Measures and the rationale for their use.

Consolidated income statement

For the six months ended 31 March 2020

Consolidated statement of comprehensive income

For the six months ended 31 March 2020

The notes on pages 23 to 43 form an integral part of this condensed consolidated half-yearly report.

Consolidated balance sheet

As at 31 March 2020

Consolidated statement of changes in equity

For the six months ended 31 March 2020

Consolidated statement of cash flows

For the six months ended 31 March 2020

Notes to the financial information

For the six months ended 31 March 2020

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 13 May 2020.

The financial information set out above does not constitute the Company's Statutory Accounts. Statutory Accounts for the year ended 30 September 2019 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") and IFRSs as issued by the International Accounting Standards Board ("IASB"), 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 2019 with the exception of the adoption of IFRS 16 "Leases", Amendments to IFRS 3 "Business Combinations: Definition of a Business" and additional critical accounting estimates and judgements relating to the impact of COVID-19, the impact of which has been detailed below.

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 2020 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") and as issued by the International Accounting Standards Board ("IASB"). The condensed consolidated half-yearly financial report should be read in conjunction with the annual financial statements for the year ended 30 September 2019, which have been prepared in accordance with IFRSs as adopted by the EU and IFRSs as issued by the IASB.

The potential impact of COVID-19 on the Group has been considered in the preparation of the interim financial statements including within our evaluation of critical accounting estimates and judgements which are detailed further below. The Directors have reviewed liquidity and covenant forecasts for the Group, which have been updated for the expected impact of COVID-19 on trading. The Directors have also considered sensitivities in respect of potential downside scenarios and the mitigating actions available in concluding that the Group is able to continue in operation for a period of at least twelve months from the date of approving the interim financial statements. Those sensitivities include a severe but plausible downside scenario for COVID-19 alongside several progressively challenging scenarios considered to be severe but remote, whereby the Group experiences:

· a significant reduction in revenue over the next 6 months of up to 23% versus the same period in the prior year, the result of a material increase in churn combined with a significant fall in new customer acquisition, licence related cross sell and upsell revenue; and

· a further period of depressed activity into the next financial year (FY 21) which reduces revenue by up to 22% versus prior year (FY 19).

In considering the suitability of these scenarios, the Directors have taken into account, among other things, performance in the last recession and the recent trading experience outlined on page 3.

Furthermore, all downside scenarios assume:

· investment reprioritisation only to the extent strategic initiatives are not compromised;

· implementation of mitigating actions to manage costs and cash in the near term which exclude staff reductions or government subsidies; and

· allocation of capital in line with our priorities outlined above.

Throughout all the downside scenarios, the Group continues to have liquidity headroom on existing facilities and against the RCF and USPP note financial covenants during the period under assessment. 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 2019 as described in those annual financial statements with the exception of the adoption of IFRS 16 "Leases" and Amendments to IFRS 3 "Business Combinations: Definition of a Business". The impact of these is explained below.

IFRS 16

As disclosed in our Annual Report 2019, the Group has adopted IFRS 16 using the modified retrospective approach to transition permitted by the standard. Under this approach, the cumulative impact of the change in accounting policy is recognised in equity on 1 October 2019 and the financial statements for the prior year are not restated. IFRS 16 replaces the previous standard on lease accounting, IAS 17.

Accounting policy under IFRS 16

The adoption of IFRS 16 has changed the accounting policy applied to most of the Group's significant arrangements in which it is a lessee. These relate mainly to property leases for office buildings. The Group also has some leases for vehicles and other equipment. Prior to 1 October 2019, the Group accounted for all such leases as operating leases under IAS 17, with rentals payable charged to the income statement on a straight-line basis as an operating expense presented within selling and administrative expenses. Where rent payments were prepaid or accrued, their balances were reported under prepayments and accruals respectively.

Under IFRS 16, the Group recognises lease assets and lease liabilities on the balance sheet for most of its leases to account for the right to use leased items and the obligation to make future lease payments. Lease liabilities are measured at the present value of future lease payments over the lease term. The lease term is determined as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if the option is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if the option is reasonably certain not to be exercised. Lease payments normally include fixed payments (including in substance fixed payments), a deduction for any lease incentives receivable and variable lease payments that depend on an index or a rate. In the event that a lease includes an exercise price for a purchase option that is reasonably certain to be exercised, or a termination penalty that is reasonably certain to be incurred, these too are included in lease payments as are any amounts expected to be paid under any residual value guarantees. Variable lease payments that do not depend on an index or a rate are not included in the lease liability, but are recognised as an expense when incurred.

Lease payments are discounted using the incremental borrowing rate applicable to the lease at the lease commencement date, as the rate implicit in the lease cannot normally be readily determined. Lease assets are recognised at the amount of the lease liability, adjusted where applicable for any lease payments made or lease incentives received before commencement of the lease, direct costs incurred at the commencement of the lease and estimated restoration costs to be incurred at the end of the lease. When IFRS 16 is applied for the first time, the standard permits certain departures from these policies as practical expedients. The practical expedients used by the Group on transition to IFRS 16 are explained below.

Right of use assets are presented within property, plant and equipment and depreciated on a straight-line basis over the shorter of their useful life and the lease term. Their carrying amounts are measured at cost less accumulated depreciation and impairment losses. Lease liabilities are presented within current and non-current borrowings. Over the lease term, the carrying amounts of lease liabilities are increased to reflect interest on the liability and reduced by the amount of lease payments made. A lease liability is remeasured if there is a modification, a change in the lease term or a change in lease payments. The costs of these leases are recognised in the income statement split between the depreciation of the lease asset and the interest charge on the lease liability. Depreciation is presented within selling and administrative expenses and interest charges within finance costs.

This policy applies mainly to the Group's leases for properties and vehicles. For short-term leases with a lease term of 12 months or less and leases of low value items, the Group has elected to apply the exemptions available under the standard. The leases to which these exemptions apply are accounted for in the same way as operating leases under IAS 17, as explained above, with no lease assets or liabilities recognised. The low value exemption has been applied to most of the Group's leases of IT and other office equipment.

Accounting for the transition to IFRS 16

On transition to IFRS 16, the Group has measured its lease liabilities at the present value of the remaining lease payments, discounted using the incremental borrowing rate (IBR) applicable to each lease at 1 October 2019. The standard permits a choice on initial adoption of measuring lease assets either as if IFRS 16 had been applied since lease commencement but discounted using the IBR at 1 October 2019, or at an amount equal to the lease liability adjusted for accrued or prepaid lease payments. The assets for the Group's property leases have been measured as if IFRS 16 had always been in place. Assets for other leases, mainly vehicles, have been measured at an amount equal to the lease liability.

The Group has made use of the following practical expedients available when the modified retrospective approach is applied to accounting for the transition to IFRS 16:

· For vehicle leases, the Group has applied a single discount rate to a portfolio of those leases with

reasonably similar characteristics;

· For all leases, the Group has excluded from the measurement of the right of use asset initial direct costs incurred when obtaining the lease; and

· The Group has relied on its existing onerous lease assessments under IAS 37 to impair right of use assets instead of performing a new impairment assessment for those assets.

The Group reassessed its lease portfolio against the new IFRS 16 definition of a lease. This resulted in a small number of contracts for property-related arrangements such as car parking not qualifying as leases because the landlord has substantive substitution rights.

Key judgements made in calculating the transition impact include determining the lease term for property leases with extension or termination options. An extension period or a period beyond a termination option are included in the lease term only if the lease is reasonably certain to be extended or not terminated. This is assessed taking account mainly of the time remaining before the option is exercisable; any economic disadvantages or benefits to exercise such as penalties or low rent payments; and operational plans for the location. In most cases, this results in lease terms being assumed to end at the next break date until an operational decision to extend or terminate, unless termination would incur penalties.

The main estimate made on transition is in determining the incremental borrowing rates used as discount rates for property leases. The incremental borrowing rate is the rate of interest that the local Sage business holding the lease would have to pay in order to borrow funds to obtain an asset of a similar value to the right-of-use asset in a similar economic environment, over a similar term and with a similar security. The incremental borrowing rate applied to each lease was determined based on the risk-free rate for the country in which the local business is located adjusted to reflect the credit risk associated with that business and the lease term remaining at 1 October 2019.

Quantification of the impact of transition

Quantification of the impact of transition to IFRS 16 and explanations of the adjustments are set out in note 12.

Amendments to IFRS 3

The Group has early adopted these amendments for business combinations and asset acquisitions occurring on or after 1 October 2019, as permitted by the transitional provisions for the amendments. The amendments would otherwise have become mandatory for the Group's business combinations and asset acquisitions occurring on or after 1 October 2020. The amendments clarify the definition of a business under IFRS 3 to help companies to determine whether an acquisition is of a business or a group of assets. The acquisition of a business is accounted for as a business combination whereas the acquisition of a group of assets is accounted for by allocating the cost of the transaction to the individual identifiable assets and liabilities on the basis of their relative fair values at the date of purchase. Goodwill is recognised only when acquiring a business.

The amendments also introduce an optional "concentration test" that permits a simplified assessment of whether an acquired set of activities and assets is not a business. If substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or group of similar identifiable assets, the concentration test is met, and the acquisition is not of a business.

The Group has applied the concentration test to the acquisition of Cake HR Limited on 28 November 2019. The transaction met the test and as a result has been accounted for as an acquisition of a group of assets and primarily of an intangible technology asset. This treatment has not resulted in any material difference to the Group's financial statements compared to accounting for the transaction as a business combination.

Adoption of new and revised IFRSs

There are no new accounting standards which are currently issued but not yet effective which the management expects would have a material impact on the Group.

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 35% of the Company's revenue is generated from sales to partners rather than end users. The key judgement is determining whether the business partner is a customer of the Group. The key criteria in this determination is whether the business partner has taken control of the product. Considering the nature of Sage's subscription products and support services, this is usually assessed based on whether the business partner has responsibility for payment, has discretion to set prices, and takes on the risks and rewards of the product from Sage.

Where the business partner is a customer of Sage, discounts are recognised as a deduction from revenue.

Where the business partner is not a customer of Sage and their part in the sale has simply been in the form of a referral, they are remunerated in the form of a commission payment. These payments are treated as contract acquisition costs.

An additional area of judgement is the recognition and deferral of revenue on on-premise subscription offerings, for example the sale of a term licence with an annual maintenance and support contract as part of a subscription contract. In such instances, the transaction price is allocated between the constituent performance obligations on the basis of standalone selling prices (SSPs). Judgement is required when estimating SSPs. The Group has established a hierarchy to identify the SSPs that are used to allocate the transaction price of a customer contract to the performance obligations in the contract. Where SSPs for on-premise offerings are observable and consistent across the customer base, SSP estimates are derived from pricing history. Where there are no directly observable estimates available, comparable products are utilised as a basis of assessment or the residual approach is used. Under the residual approach, the SSP for the offering is estimated to be the total transaction price less the sum of the observable SSPs of other goods or services in the contract. The Group uses this technique in particular for estimating the term licence SSP sold as part of its on-premise subscription offerings as Sage has previously not sold term licences on a stand-alone basis (i.e., the selling price is uncertain).

Goodwill impairment

A key judgement is the ongoing appropriateness of the cash-generating units ("CGUs") for the purpose of impairment testing.

The assumptions applied in calculating the value in use of the CGUs being tested for impairment is a source of estimation uncertainty. The key assumptions applied in the calculation relate to the future performance expectations of the business - average medium-term revenue growth and long-term growth rate - as well as the discount rate to be applied in the calculation.

Following challenging current trading and economic conditions in Asia, management has reassessed the expected future business performance relating to the Asia group of CGUs. The revised projected cash flows are lower and this has led to an impairment charge of £19m, which is the total value of goodwill in Asia.

Due to the ongoing COVID-19 pandemic as noted on page 3 we have compared our sensitivity analysis used in the annual impairment review as disclosed in the 30 September 2019 financial statements against our current and forecasted trading performance. With the exception of Asia, as discussed above, there is no significant CGU or group of CGUs, including the Intacct CGU, where management have concluded that the carrying value of the CGU or group of CGUs exceeds its recoverable amount. The carrying value of goodwill and the key assumptions used in performing the annual impairment assessment are disclosed in the 30 September 2019 financial statements.

Trade receivables 

Due to COVID-19 the timing and level of impact of business failures is uncertain. Therefore, the expected credit loss allowance against trade receivables is a source of estimation uncertainty. Current and expected collection of trade receivables since the start of the COVID-19 pandemic has been modelled on a region-specific basis, taking into account macroeconomic factors, such as revised GDP outlooks and government support available and other regional specific microeconomic factors. Compared to historical collection rates management have provided an additional £13m expected credit loss provision representing an additional 10% loss rate above historical rates.

Website

This condensed consolidated half-yearly financial report for the six months ended 31 March 2020 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 President and Chief Financial Officer. The Executive Committee uses 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 nine key operating segments: North America (excluding Intacct) (US and Canada), North America Intacct, Northern Europe (UK and Ireland), Central Europe (Germany, Austria and Switzerland), France, Iberia (Spain and Portugal), Africa and the Middle East, Asia (including Australia) and Latin America. For reporting under IFRS 8, the Group is divided into three reportable segments. These segments are as follows:

· North America (North America (excluding Intacct) and North America Intacct)

· Northern Europe

· Central and Southern Europe (Central Europe, France and Iberia)

The remaining operating segments of Africa and the Middle East, Asia (including Australia) and Latin America do not meet the quantitative thresholds for presentation as separate reportable segments under IFRS 8, and so are presented together and described as International. They include the Group's operations in South Africa, UAE, Australia, Singapore, Malaysia and Brazil.

The reportable segments reflect the aggregation of the operating segments for Central Europe, France and Iberia, and also of those for North America (excluding Intacct) and North America Intacct. In each case, the aggregated operating segments are considered to share similar economic characteristics because they have similar long-term gross margins and operate in similar markets. Central Europe, France and Iberia operate principally within the EU and the majority of their businesses are in countries within the Euro area. North America (excluding Intacct) and North America Intacct share the same North American geographical market and therefore share the same economic characteristics. The UK is the home country of the parent.

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. With effect from 1 October 2019, the Group reports revenue under two revenue categories as noted below:

Prior to this the Group reported three revenue categories: Recurring revenue, Software and software-related services and Processing revenue. The aggregation of Software and software-related services and Processing revenue into the Other revenue category reflects the focus on recurring revenue and the divestment of certain processing businesses. There is no change to the revenue recognition policy in the period as disclosed in the annual financial statements for the year ended 30 September 2019. 

Revenue by segment (Unaudited)

* Adjustments relate to the disposal of Sage Pay and Brazil (note 11).

Revenue by segment (Unaudited)

* Adjustments relate to the disposal of Sage Pay and Brazil in the current period (note 11) and acquisition of Ocrex Limited and disposal of Sage Payroll Solutions in the prior year.

** Previously reported as Software and software-related services and Processing revenue categories.

Operating profit by segment (Unaudited)

Reconciliation of underlying operating profit to statutory operating profit

3 Adjustments between underlying profit and statutory profit (Unaudited)

Recurring items

Acquired intangibles are assets which have previously been recognised as part of business combinations or similar transactions. These assets are predominantly brands, customer relationships and technology rights.

Other M&A activity-related items comprise the cost of carrying out M&A activities including business combinations as well as acquisition-related remuneration and directly attributable integration costs arising on business combinations.

The fair value adjustment comprises a charge of £1m (H1 FY19: charge of £nil) in relation to an embedded derivative asset which relates to contractual terms agreed as part of the US private placement debt.

Foreign currency movements on intercompany balances of £nil (H1 FY19: £1m) occurs due to retranslation of intercompany balances other than those where settlement is not planned or likely in the foreseeable future.

Non-recurring items

Details of the gain/(loss) on disposal of subsidiaries can be found in note 11.

Following challenging current trading and economic conditions in Asia, an impairment of the goodwill relating to the Asia group of CGUs has been recognised. See note 7 for further details.

Property restructuring costs relate to the reorganisation of the Group's properties and consist of net lease exit costs following consolidation of office space and impairment of leasehold and other related assets that are no longer in use. This is one programme that has bridged two financial years therefore the Group has continued to present these costs as non-recurring. The Group is anticipating incurring additional costs in connection with the reorganisation programme of the Group's property portfolio.

Office relocation costs relate to the incremental depreciation charge resulting from accelerated depreciation following the announced UK office move.

Cash paid in relation to recurring and non-recurring items in the year of £6m relates to M&A activity-related items and property restructuring costs.

4 Income tax expense

The effective tax rate on statutory profit before tax was 19% (six months ended 31 March 2019: 22%) whilst the effective tax rate on underlying profit before tax for continuing operations was 27% (six months ended 31 March 2019: 26%). The effective income tax rate represents the best estimate of the average annual effective income tax rate expected for the full year, applied to the profit before income tax for the six months ended 31 March 2020.