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Sage Group PLC Final Results

20/11/2020 7:00am

UK Regulatory (RNS & others)


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TIDMSGE

RNS Number : 9474F

Sage Group PLC

20 November 2020

The Sage Group plc audited results for the year ended 30 September 2020

Friday 20 November 2020

Strong financial performance and continued strategic execution

 
 -   Continued strong growth in high quality organic recurring revenue 
      of 8.5%, in line with guidance at the start of the year, with 
      90% of total revenue now recurring 
 -   Organic operating margin of 22.1%, reflecting ongoing investment 
      in the business 
 -   Sustained strong cash generation, with underlying cash conversion 
      of 123% 
 -   Resilient balance sheet, with c. GBP1.2bn of cash and available 
      liquidity; net debt to EBITDA ratio of 0.3x 
 -   Good progress in strategic execution, with software subscription 
      penetration of 65% and Sage Business Cloud penetration of 61% 
 -   Further targeted investment planned for FY21 to drive future 
      growth, led by cloud native solutions 
 
 
 Alternative Performance Measures              FY20    FY19 (2)      Change 
  (APMs) (1) 
 Organic Financial APMs (excluding 
  assets held for sale (3) ) 
 Organic Total Revenue                    GBP1,768m   GBP1,705m       +3.7% 
 Organic Recurring Revenue                GBP1,592m   GBP1,468m       +8.5% 
 Organic Operating Profit                   GBP391m     GBP406m       -3.7% 
     % Organic Operating Profit Margin        22.1%       23.8%   -1.7 ppts 
 
 Underlying Financial APMs 
 EBITDA                                     GBP498m     GBP502m       -0.7% 
 Underlying Operating Profit                GBP411m     GBP441m       -6.7% 
     % Underlying Profit Margin               21.6%       23.2%   -1.6 ppts 
 Underlying Basic EPS                        27.43p      27.88p       -1.6% 
 Underlying Cash Conversion                    123%        129%     -6 ppts 
 
 KPIs 
 Annualised Recurring Revenue (ARR)       GBP1,611m   GBP1,538m       +4.8% 
 Renewal Rate by Value                          99%        101%     -2 ppts 
 % Subscription Penetration                     65%         56%     +9 ppts 
 % Sage Business Cloud Penetration              61%         51%    +10 ppts 
 
 Statutory Measures                            FY20        FY19    % Change 
                                         ----------  ----------  ---------- 
 Revenue                                  GBP1,903m   GBP1,936m       -1.7% 
 Operating Profit                           GBP404m     GBP382m       +5.8% 
     % Operating Profit Margin                21.3%       19.7%   +1.6 ppts 
 Basic EPS (p)                               28.38p      24.49p      +15.9% 
 Dividend Per Share (p)                      17.25p      16.91p       +2.0% 
                                         ----------  ----------  ---------- 
 

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

FY20 Financial Performance

 
 -   Organic recurring revenue (excluding assets held for sale) 
      increased by 8.5% to GBP1,592m, underpinned by software subscription 
      revenue growth of 20.5% to GBP1,141m. This was offset by a 
      26.1% decrease in other revenue (SSRS and processing) to GBP176m. 
      Total organic revenue grew by 3.7% to GBP1,768m. 
 -   Including assets held for sale (3) , recurring revenue growth 
      increased by 8.2% to GBP1,674m, underpinned by software subscription 
      revenue growth of 20.2% to GBP1,197m, and offset by a 25.8% 
      decrease in other revenue (SSRS and processing) to GBP192m. 
      Total revenue grew by 3.3% to GBP1,866m. 
 -   Growth in recurring revenue 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) is in line 
      with our strategy to transition to subscription revenue and 
      away from licence sales and low margin professional services 
      implementations. As expected, this reduction accelerated in 
      the second half due to the impact of COVID-19. 
 -   Organic operating profit of GBP391m, representing a margin 
      of 22.1% (FY19: 23.8%), reflects continued investment to drive 
      strategic execution, and a GBP17m bad debt provision in connection 
      with COVID-19. Including assets held for sale, operating profit 
      was GBP406m, a margin of 21.8%. 
 -   Non-recurring gain of GBP46m (FY19: loss of GBP14m) includes 
      a GBP141m net gain on disposals (Sage Pay and the Brazilian 
      business), offset by office relocation and property restructuring 
      charges of GBP54m, a GBP19m charge for goodwill impairment 
      in respect of the Asian business as previously announced, 
      and restructuring charges of GBP22m reflecting the move away 
      from low margin professional services revenue. 
 -   Continued strong cash generation, with cash conversion above 
      100% for the second consecutive year. Cash conversion of 123% 
      (FY19: 129%) reflects continued growth in software subscription 
      and sustained improvements in working capital, with particular 
      success in the collection of receivables. 
 -   Resilient balance sheet, with c. GBP1.2bn of cash and available 
      liquidity (comprising GBP848m of cash and cash equivalents, 
      and GBP398m of undrawn facilities), and net debt to EBITDA 
      of 0.3x as at 30 September 2020. 
 -   Full year dividend up 2.0% to 17.25p, including a final dividend 
      of 11.32p. This reflects the Group's strong business performance, 
      cash generation and liquidity position, and is in line with 
      our policy of maintaining the dividend in real terms. 
 
 Progress in strategic execution 
 -   We've enhanced customer experience with improved processes 
      and technology, further investing in multichannel support 
      as lockdowns were implemented. We launched online COVID-19 
      hubs in our major regions with focused content and interactive 
      sessions to help customers navigate the pandemic. 
 -   We've continued to focus on embedding our values and on developing 
      and engaging colleagues. This has been central to our COVID-19 
      response, driving strong teamwork and customer focus while 
      colleagues continue to work largely from home. Our Glassdoor 
      score is now 4.4 out of 5. 
 -   In innovation, we continued to deliver against our product 
      roadmap. We enhanced our small business proposition with the 
      launch of Sage Accounting Plus in the UK and the acquisition 
      of CakeHR. For medium customers we launched Sage Intacct in 
      the UK and South Africa, taking its footprint to five countries. 
      We also integrated AI capabilities including innovations in 
      timesheet management and error detection. 
 -   We continue to reshape the portfolio and increase focus on 
      Sage Business Cloud, completing the disposals of Sage Pay 
      and the Brazilian business in March, with further divestitures 
      planned (including certain businesses within Central & Southern 
      Europe and International, held for sale at the year-end (3) 
      ). 
 Continued focus on strategic execution has resulted in: 
 -   Recurring revenue increasing to 90% of total revenue (FY19: 
      86%) with software subscription penetration now at 65% (FY19: 
      56%). 
 -   Future Sage Business Cloud Opportunity (Sage Business Cloud 
      and products with potential to migrate) recurring revenue 
      growth of 10%. Sage Business Cloud penetration (4) increased 
      to 61% (FY19: 51%), reflecting continuing progress in the 
      shift towards cloud connected and cloud native solutions. 
 -   Renewal by value (5) reduced slightly to 99% (FY19: 101%), 
      reflecting lower levels of upsell to existing customers during 
      the second half. 
 -   Annualised recurring revenue (6) (ARR) increased by 5% to 
      GBP1,611m, reflecting continued revenue growth despite COVID-19, 
      which particularly impacted the third quarter. 
 
 
 1   (Please see Appendix 1 for guidance on the usage and definitions 
      of the Alternative Performance Measures.) 
 2   Organic revenue and operating profit for FY19 is restated to 
      aid comparability with FY20. The definition of organic measures 
      can be found in Appendix 1 with a full reconciliation of organic, 
      underlying and statutory measures on page 10. Unless otherwise 
      specified, all references to revenue, profit and margins are 
      on an organic basis. 
 3   Assets held for sale at year-end include businesses in Central 
      Europe and International. Further details are included on page 
      8. 
 4   Defined as organic recurring revenue from Sage Business Cloud 
      as a proportion of organic recurring revenue from 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. 
6    Defined as the normalised organic recurring revenue in the 
      last month of the reporting period, adjusted consistently period 
      to period, multiplied by twelve. 
 

Strategic priorities for FY21 and beyond

Sage has made considerable progress in its transition to a SaaS business model over the last two years, significantly increasing the proportion of revenue from subscription and Sage Business Cloud, and delivering on the priorities we set out in 2018.

Sage Business Cloud adoption and growth will remain our key objective in FY21 and beyond. However, with the pace of digital transformation among small and medium businesses now growing, we intend to increase our focus on accelerating cloud native solutions across the Group, initially in our largest markets of Northern Europe and North America. At the same time, cloud connected will remain an important driver of growth, particularly in Continental Europe. We will also focus on further embedding SaaS capability and culture throughout Sage.

To support these strategic priorities, Sage intends to allocate further resource to Sage Business Cloud, in particular to cloud native solutions, and to increase its investment in sales and marketing and product development (R&D). This will be part-funded by cost savings from the restructuring of our professional services business, and other efficiencies across the Group. Given the uncertain economic environment due to COVID-19, we may flex the level of sales and marketing investment dynamically during the year, in response to market conditions.

The increased investment is expected to result in a planned reduction in organic operating margin of up to three percentage points. Delivery of these strategic priorities is expected to drive recurring revenue growth and new customer acquisition, generate efficiencies and, over time, lead to significant value creation through sustainable profit and cash generation.

Outlook

Against the uncertain economic backdrop, we currently expect organic recurring revenue growth for FY21 to be in the region of 3% to 5%, weighted towards the second half of the year. We also expect other revenue (SSRS and processing) to continue to decline, in line with our strategy. Organic operating margin is expected to be up to three percentage points below FY20, depending on the level of additional investment we make during the year.

Looking beyond FY21, we expect margins to trend upwards over time, as the investment drives recurring revenue growth and operating efficiencies.

Steve Hare, CEO, said:

"We've delivered a strong performance in FY20, achieving recurring revenue growth in line with the guidance we gave at the beginning of the year, despite the COVID-19 pandemic. I would like to thank all of our colleagues and partners for their continuing commitment to our customers, communities and each other during this period. We've also made good strategic progress, delivering against our customer, colleague and innovation commitments. While the near term remains uncertain, these foundations position us well to support customers as they adopt digital business models, and I am confident that our additional investment in Sage Business Cloud, and in particular cloud native solutions, will deliver stronger growth and drive the future success of the Group."

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.

 
                                                            +44 (0) 20 3727 
Enquiries:   Sage:   +44 (0) 191 294 3457  FTI Consulting:   1000 
 James Sandford, Investor                  Charles Palmer 
  Relations 
 Amy Lawson, Corporate PR                  Dwight Burden 
 

A presentation for investors and analysts will webcast at 8.30am UK time. The webcast can be accessed via www.sage.com/investors . Participants may also dial in by calling +44 (0) 20 7192 8338, using pin code 9039088 . A replay of the call will also be available for one week after the event on +44 (0) 333 300 9785 using pin code 9039088.

CEO Review

Sage has achieved a strong performance in FY20, delivering significant, high quality recurring revenue growth, while continuing to focus on attracting new customers and migrating existing customers to Sage Business Cloud. At the same time, we have executed at pace on our strategic priorities, guided by our purpose of transforming the way people think and work, so their organisations can thrive.

Early in the COVID-19 crisis, we moved decisively to protect the health and wellbeing of our colleagues, and to provide continued support to our customers and partners. While the pandemic continues to create uncertainty for small and medium businesses, moderating Sage's growth in the short-term, our consistent focus on customer success has supported our performance to date.

At the same time, the pace of digital transformation among small and medium businesses is increasing, and delivering Sage Business Cloud innovations as scheduled throughout the year has positioned us well to support customers as they adopt new digital solutions. In FY21, our planned investment in Sage Business Cloud and particularly in cloud native solutions, together with continued focus on embedding SaaS capability and culture, are expected to drive further progress on our journey to becoming a great SaaS company.

FY20 Results

In FY20 the Group delivered organic recurring revenue growth of 8.5% to GBP1,592m, and organic total revenue growth of 4% to GBP1,768m. The increase in recurring revenue, underpinned by a 21% rise in software subscription revenue to GBP1,141m, was driven by growth from existing and new customers, principally in North America and Northern Europe.

In North America, recurring revenue grew by 11% to GBP634m, driven by strong cloud native growth from Sage Intacct together with cloud connected solutions. Northern Europe continued to grow strongly with recurring revenue growth of 9% to GBP377m, reflecting good momentum carried into the period, further cloud connected contracts, and growth in cloud native solutions. After a stronger first half, the impact of COVID-19 caused growth to ease back in the second half.

Other revenue (SSRS and processing) decreased by 26%, in line with our strategy to transition to subscription revenue and away from licence sales and professional services implementations. As expected, this decline accelerated in the second half due to COVID-19.

Portfolio View of Revenue

 
Revenue by Portfolio (7)                   Recurring                       Total 
                                    FY20       FY19     Growth    FY20       FY19     Growth 
                                  ---------  ---------  ------  ---------  ---------  ------ 
                                    GBPm       GBPm       %       GBPm       GBPm       % 
                                  ---------  ---------  ------  ---------  ---------  ------ 
Cloud native (8)                    GBP222m    GBP172m    +29%    GBP234m    GBP184m    +27% 
Cloud connected (9)                 GBP636m    GBP480m    +33%    GBP650m    GBP497m    +31% 
                                  ---------  ---------  ------  ---------  ---------  ------ 
Sage Business Cloud                 GBP858m    GBP652m    +32%    GBP884m    GBP681m    +30% 
Products with potential to 
 migrate                            GBP557m    GBP634m    -12%    GBP666m    GBP792m    -16% 
                                  ---------  ---------  ------  ---------  ---------  ------ 
Future Sage Business Cloud 
 Opportunity (10)                 GBP1,415m  GBP1,286m    +10%  GBP1,550m  GBP1,473m     +5% 
Non-Sage Business Cloud (11)        GBP177m    GBP182m     -2%    GBP218m    GBP232m     -6% 
                                  ---------  ---------  ------  ---------  ---------  ------ 
Organic Total Revenue             GBP1,592m  GBP1,468m     +8%  GBP1,768m  GBP1,705m     +4% 
                                  ---------  ---------  ------  ---------  ---------  ------ 
Sage Business Cloud Penetration         61%        51% 
                                  ---------  --------- 
 
 
 
 7    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. 
 8    Revenue from subscription customers using products that are part 
       of Sage's strategic future product portfolio, where that product 
       runs in a cloud-based environment enabling customers to access 
       full, updated functionality at any time, from any location, over 
       the Internet. 
 9    Revenue from subscription customers using products that are part 
       of Sage's strategic future product portfolio, where that product 
       is normally deployed on-premise and for which a substantial part 
       of the value proposition is linked to functionality delivered 
       in, or through the cloud. 
 10   Revenue from customers using products that are part of, or that 
       management believe have a clear pathway to, Sage Business Cloud. 
 11   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 attract new customers and continue to migrate desktop 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 perform well, with recurring revenue growth of 10% and total revenue growth of 5%. Cloud native solutions have delivered recurring revenue growth of 29%, with Sage Intacct delivering recurring revenue growth of 26%.

The strong growth in cloud connected recurring revenue of 33% to GBP636m reflects momentum from the migration of existing customers predominantly in North America and Northern Europe, as well as further growth from new customers acquired in the year. The focus on driving revenue to cloud solutions has resulted in Sage Business Cloud penetration of 61%, up from 51% in the prior year.

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 6% 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.

Review of strategic progress

At our FY18 results announcement, we set out our initial priorities to drive the transition to a SaaS business. Our focus on the strategic lenses of customer success, colleague success and innovation, as well as on simplifying our product portfolio, has ensured that we have delivered against the commitments we made.

Customer success

Our objective in customer success has been to drive a more customer-centric approach, improving the customer experience and resulting in deeper and longer-lasting customer relationships.

To support this objective, we reshaped our organisation and reporting lines around the small and medium business segments, enabling a deeper focus on the specific needs of customers in each segment. We've invested in new systems to improve the level of customer insight and service efficiency, and we've continued to digitise customer service, reducing call waiting times and accelerating the resolution of customer problems.

These improvements have enabled Sage to provide extensive support and advice to small and medium businesses in the light of COVID-19. In our major markets, we've established online COVID-19 advice hubs, provided webinars and other interactive sessions, and developed special-purpose software to support customers when applying for government funds, reinforcing our reputation for strong customer support.

Colleague success

In colleague success, we aim to build 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 we do.

We've invested in the training of colleagues, running development programmes both for our leaders and for emerging talent, and establishing senior sponsorship and mentoring schemes. We've also launched refreshed values and behaviours, and embedded them within the business through our performance review approach and culture workshops.

Colleague experience and engagement has been a key focus, especially during the COVID-19 pandemic. Close teamwork and a strong sense of cohesion has been maintained through a range of focused initiatives including daily and weekly leadership communications, networking groups, e-learning and support for mental wellbeing. From March to May, we ran weekly "Always Listening" surveys to support our COVID-19 response, which indicated almost universal appreciation among colleagues for Sage's response to the pandemic, and showed us where colleagues needed more support, inspiring initiatives such as a Headspace subscription for every colleague.

The result of investing in colleague experience is more invigorated, engaged colleagues who are better able to support the success of Sage's customers. Our most recent colleague NPS scores show an increase of 60 points over the last two years, while Sage's Glass Door rating has increased to 4.4, up from 2.9 in FY18.

Innovation

Innovation at Sage means developing solutions to customer problems by integrating emerging technology and accelerating the availability and adoption of Sage Business Cloud.

Sage has increased investment in R&D by around GBP60m since FY18, and expanded the Group's total engineering headcount by around 20%, with a focus on Sage Business Cloud. As a result, in FY20 Sage spent around 15% of recurring revenue on R&D, up from 13% in FY18. This has supported strong innovation progress particularly in our cloud native portfolio.

For smaller customers, we've developed and acquired products and functionality to create a differentiated proposition across accounting, automation, payroll and HR, that enhances customers' control over their most important business processes.

 
 -   We launched Sage Accounting Plus in the UK in May. Since the 
      launch, the pace of growth in Sage Accounting has accelerated, 
      attracting new customers directly and through accountant referrals. 
 -   AutoEntry, our data automation solution which we acquired at 
      the end of FY19, has been integrated with key products including 
      Sage Accounting and Sage 50. 
 -   We acquired CakeHR, an HR management solution which enables 
      small businesses to manage workforces with tools such as reporting, 
      organisational charts, payslips, absence requests and schedules. 
 For medium sized customers, we've focused on giving more geographies 
  access to cloud native solutions, as well as enhancing overall 
  functionality. 
 -   We launched Sage Intacct in South Africa in August, and have 
      made strong progress in the UK and Australia following its launch 
      in those countries last year, achieving nearly GBP2m of ARR 
      so far from new customers outside North America. Sage Intacct 
      is now available in five countries. 
 -   We launched Sage Intacct Construction, designed to meet the 
      unique needs of construction and real estate companies, with 
      strong early demand following its launch in the US in March. 
 -   We've developed technology platforms that enable existing Sage 
      desktop or cloud connected customers to migrate to a cloud native 
      solution, such as SEOS, our managed cloud solution. 
 

Sage also continued to invest in building out the Sage Business Cloud environment, and in developing AI capabilities through Sage AI Labs. Key projects include Sage Intelligent Time, a time tracking tool that uses AI to learn from an employee's calendar and working patterns, and an outlier detection tool designed to spot accounting mistakes and irregularities.

Simplifying the product portfolio and driving the migration strategy

Increasing the Group's focus on Sage Business Cloud is a key priority for Sage. Since FY18, we have driven the rapid migration of desktop customers to cloud connected solutions across the Group, with particular success in the UK and North America, and accelerating progress in Continental Europe. This has resulted in cloud connected revenues almost tripling from 13% of Group total revenue in FY18 to 37% in FY20. We have also grown cloud native revenues, mainly through new customer acquisition, from 8% of total revenue in FY18 to 13% in FY20.

At the same time, we have pursued divestment or other value creation paths for non-core products which have no route to Sage Business Cloud, resulting in the reduction of revenue from non-Sage Business Cloud products so far by more than a third since FY18. This portfolio simplification has resulted in a more focused business with a greater mix of higher quality, recurring revenue.

Accelerating strategic execution - our priorities for FY21 and beyond

Sage has made considerable progress in its transition to a SaaS business model over the last two years, significantly increasing the proportion of revenue from subscription and Sage Business Cloud, and delivering on the priorities we set out in 2018.

Sage Business Cloud adoption and growth will remain our key objective in FY21 and beyond. However, with the pace of digital transformation among small and medium businesses now growing, we intend to increase our focus on accelerating fully hosted, cloud native solutions across the Group, initially in our largest markets of Northern Europe and North America. At the same time, cloud connected will remain an important driver of growth, particularly in Continental Europe. We will also focus on further embedding SaaS capability and culture throughout Sage.

To support these strategic priorities, Sage intends to allocate further resource to Sage Business Cloud, in particular to cloud native solutions, and to increase its investment in sales and marketing and product development (R&D). The sales and marketing investment will drive sales growth directly through digital marketing, as well as helping to promote and build the Sage brand. The product development investment will accelerate innovation, developing the digital environment including new collaboration and workflow tools, increasing our focus on AI, and further driving the availability and adoption of Sage Business Cloud.

The increased investment will be part-funded by cost savings from the restructuring of our professional services business, and other efficiencies across the Group. Given the uncertain economic environment due to COVID-19, we may flex the level of sales and marketing investment dynamically during the year, in response to market conditions.

This investment is expected to result in a planned reduction in organic operating margin of up to three percentage points. Delivery of these strategic priorities is expected to drive recurring revenue growth and new customer acquisition, generate efficiencies and, over time, lead to significant value creation through sustainable profit and cash generation.

Sage Business Cloud powered by cloud native

Cloud native represents a rapidly growing opportunity for Sage, as customers increasingly look to digitise their businesses and benefit from the operational advantages of a fully hosted solution, including anytime anywhere access and automatic upgrades. To address this opportunity, we have developed an integrated suite of cloud native solutions, focused on meeting the needs of small and medium sized customers:

 
 -   For smaller customers, we've created a differentiated end-to-end 
      proposition for businesses that spans accounting, automation, 
      payroll and HR. Based around Sage Accounting, our solutions 
      allow customers to scale from an entry-level accounting package 
      to a full suite of integrated back-office software that enables 
      them to manage their finances, operations and people. 
 -   For medium sized customers, we've created solutions which provide 
      deeper business insight and richer functionality to support 
      more complex customer needs, integrating capabilities across 
      financials, reporting and analytics, budgeting and planning 
      and people management, based around our award-winning Sage Intacct 
      and Sage People solutions. 
 

This portfolio provides a strong platform from which to accelerate cloud native growth.

Winning in our target markets

While we aim to accelerate cloud native solutions across the Group, our initial focus will be in our largest markets of Northern Europe and North America, which together account for almost two thirds of Sage's recurring revenue.

In Northern Europe, our priority is to increase new customer acquisition through our integrated cloud native portfolio, leveraging our brand and customer success expertise in order to defend and grow Sage's market leading position among small businesses in this region. This will be further driven by transforming relationships with accountants and resellers in order to broaden our reach through the ecosystem.

In North America, our priority is to attract new and existing customers to our medium cloud native solutions, including Sage Intacct and Sage People. We recently created a single organisation in the US, combining the cloud native expertise of Sage Intacct with the breadth of our installed base of Sage 200 and X3 customers, in order to drive a co-ordinated, vertical-focused market approach.

Embedding SaaS capability and culture

Management is committed to further developing Sage's SaaS capabilities, based on a customer-centric, fast-paced and inclusive culture that enables colleagues to perform at their best in a sustainable way. This is supported by a talent strategy that focuses on colleague success through the development of internal talent, selective acquisition of external talent, sharpening our understanding of future needs, and promoting diversity and inclusion.

Sage's role in society and our community

As part of its broader corporate responsibility, Sage has a significant role to play in addressing the societal, economic and environmental challenges facing our business, our colleagues, our customers and our communities, now and in the future.

Sage Foundation represents a core part of our values, supporting the communities we operate in, and serving to attract and retain talent. All colleagues are encouraged to take up to five days each year, on a fully paid basis, to support charitable initiatives under Sage Foundation. As a result, colleagues contributed more than 24,300 volunteering days in FY20, including under "virtual volunteering" initiatives.

Our approach to Diversity and Inclusion (D&I), known as Sage Belong, focuses on promoting an inclusive environment for all colleagues, where we reflect, understand, visibly respect and encourage the diversity of our colleagues, customers and the communities we serve. This year we have seen colleagues actively engage with listening forums focused on the racial justice protests. Several new colleague success networks have been established to continue the discussion and inform our strategy. These informal, colleague-led groups are reinforced by our D&I Council, chaired by the CEO and Chief People Officer, ensuring alignment of D&I priorities with our overall business strategy.

We are committed to responsibly managing our use of resources and the environmental impact of the solutions we provide to our customers and partners. Following a detailed review of our environmental approach, Sage will adopt a new environmental strategy in FY21. This includes an ambitious plan to set clear, science-based targets with a full roadmap as part of the implementation of a Net Zero strategy.

Further simplifying the business

Creating a simpler and more focused business remains a key priority of Sage. In March 2020 we completed the disposals of Sage Pay and the Brazilian business, reducing Sage's exposure to non-core business lines and geographies.

We have continued to make progress against this objective, with assets held for sale as at the year-end including:

 
 -   within the Central and Southern Europe segment, Sage's businesses 
      in Poland and Switzerland; and 
 -   within the International segment, Sage's businesses in Asia 
      and Australia (excluding global products that are core to our 
      strategy such as Sage Intacct, Sage People and Sage X3), and 
      Sage's South African payroll outsourcing business. 
 

The assets held for sale comprise mainly local products which are not part of Sage Business Cloud. In FY20, the assets held for sale delivered total revenue of GBP98m (FY19: GBP100m) and operating profit of GBP15m (FY19: GBP18m).

Financial Review

This financial review provides a summary of Sage's financial results on an organic basis, as well as considering 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 FY20 Sage delivered organic recurring revenue growth of 8% to GBP1,592m and organic total revenue growth of 4% to GBP1,768m. The increase in recurring revenue, underpinned by a 21% rise in software subscription revenue to GBP1,141m, was driven by growth from existing and new customers, principally in North America and Northern Europe.

Other revenue (SSRS and processing) declined by 26% to GBP176m, in line with our strategy to transition to subscription revenue and away from licence sales and professional services implementations. As expected, this reduction accelerated in the second half due to the impact of COVID-19.

The Group's organic operating profit decreased by 4% to GBP391m, representing an organic operating margin of 22.1% (FY19: 23.8%). This margin reflects continued investment to drive strategic execution, and includes a GBP17m charge to provide for potential bad debts in connection with COVID-19.

The Group also achieved underlying basic EPS of 27.43p, strong underlying cash conversion of 123% and free cash flow of GBP382m.

Statutory and Underlying Financial Results

 
 Financial Results                  Statutory                        Underlying (12) 
---------------------  ----------------------------------  ---------------------------------- 
                             FY20        FY19      Change        FY20        FY19      Change 
---------------------  ----------  ----------  ----------  ----------  ----------  ---------- 
 North America            GBP692m     GBP657m         +5%     GBP692m     GBP657m         +5% 
 Northern Europe          GBP412m     GBP406m         +1%     GBP412m     GBP406m         +1% 
 Central & Southern 
  Europe                  GBP590m     GBP608m         -3%     GBP590m     GBP604m         -2% 
 International            GBP209m     GBP265m        -21%     GBP209m     GBP237m        -12% 
                       ----------  ----------  ----------  ----------  ----------  ---------- 
 Group Total Revenue    GBP1,903m   GBP1,936m         -2%   GBP1,903m   GBP1,904m          0% 
 Operating Profit         GBP404m     GBP382m         +6%     GBP411m     GBP441m         -7% 
 % Operating Profit 
  Margin                    21.3%       19.7%   +1.6 ppts       21.6%       23.2%   -1.6 ppts 
 Profit Before Tax        GBP373m     GBP361m         +3%     GBP386m     GBP417m         -7% 
 Net Profit               GBP310m     GBP266m        +16%     GBP299m     GBP309m         -3% 
 Basic EPS                 28.38p      24.49p        +16%      27.43p      27.88p         -2% 
                       ----------  ----------  ----------  ----------  ----------  ---------- 
 

The Group achieved statutory total revenue of GBP1,903m, a 2% decrease on the prior year. Underlying growth in North America and Northern Europe was offset by the disposal of Sage Pay and the Brazilian business, together with foreign exchange headwinds, principally in International. Underlying total revenue, which normalises the comparative period for foreign currency movements, was almost unchanged.

Statutory operating profit increased by 6% to GBP404m, reflecting the non-recurring net gain on the disposal of Sage Pay and the Brazilian business, together with the underlying performance of the Group and other recurring and non-recurring items. Underlying operating profit, which excludes recurring and non-recurring items, decreased by 7% to GBP411m.

Statutory basic EPS increased by 16% to 28.38p, principally reflecting the non-recurring gain and a lower statutory tax charge compared to FY19. Underlying basic EPS declined by 2% to 27.43p, reflecting the underlying performance of the Group together with a lower underlying tax charge.

Underlying & Organic Reconciliations to Statutory

 
                                                             FY20                              FY19 
                                              ----------------------------------  ------------------------------- 
                                                Revenue    Operating   Operating   Revenue   Operating  Operating 
                                                             Profit      Margin                Profit     Margin 
                                                                           %                                % 
                                              -----------  ----------  ---------  ---------  ---------  --------- 
Statutory                                       GBP1,903m     GBP404m      21.3%  GBP1,936m    GBP382m      19.7% 
Recurring items (13)                                    -      GBP53m          -          -     GBP52m          - 
Non-recurring items: 
                                                        -   (GBP141m)          -          -   (GBP28m)          - 
  *    Net gain on disposal of subsidiaries 
                                                        -           -          -          -     GBP14m          - 
  *    Impairment of assets held for sale 
                                                        -      GBP19m          -          -          -          - 
  *    Asia goodwill impairment 
                                                        -      GBP21m          -          -     GBP16m          - 
  *    Property restructuring costs 
                                                        -      GBP22m          -          -          -          - 
  *    Professional Services restructuring 
                                                        -      GBP33m          -          -     GBP12m          - 
  *    Office relocation 
Impact of FX (14)                                       -           -          -   (GBP32m)    (GBP7m)          - 
                                              -----------  ----------  ---------  ---------  ---------  --------- 
Underlying                                      GBP1,903m     GBP411m      21.6%  GBP1,904m    GBP441m      23.2% 
Disposals                                        (GBP37m)     (GBP5m)          -  (GBP103m)   (GBP16m)          - 
Held for sale                                    (GBP98m)    (GBP15m)          -  (GBP100m)   (GBP18m)          - 
Acquisitions                                            -           -          -      GBP4m    (GBP1m)          - 
                                              -----------  ----------  ---------  ---------  ---------  --------- 
Organic                                         GBP1,768m     GBP391m      22.1%  GBP1,705m    GBP406m      23.8% 
                                              -----------  ----------  ---------  ---------  ---------  --------- 
 
 
         Revenue and profit measures are defined in Appendix 1. 
  (12) 
         Recurring and non-recurring items are detailed in the paragraph 
  (13)    below and in note 3 of the financial statements. 
        ---------------------------------------------------------------- 
         Impact of retranslating FY19 results at FY20 average rates. 
  (14) 
        ---------------------------------------------------------------- 
 

Revenue

The Group achieved statutory and underlying revenue of GBP1,903m in FY20. Underlying revenue in FY19 of GBP1,904m reflects statutory revenue of GBP1,936m retranslated at current year exchange rates, resulting in an FX adjustment of GBP32m.

Organic revenue of GBP1,768m (FY19: GBP1,705m) reflects underlying revenue adjusted for GBP37m of revenue from assets sold during the period (FY19: GBP103m), including GBP17m of revenue from Sage Pay (FY19: GBP39m) and GBP20m from the Brazilian business (FY19: GBP43m). There is a further adjustment for assets held for sale of GBP98m (FY19: GBP100m), comprising GBP52m of revenue in relation to the International segment (FY19: GBP52m), and GBP46m in relation to the Central and Southern Europe segment (FY19: GBP48m). FY19 organic revenue also includes a GBP21m adjustment for the disposals of the US payroll processing business and the South African payments business , and a GBP4m adjustment relating to the acquisition of AutoEntry.

Operating profit

The Group achieved a statutory operating profit of GBP404m in FY20 (FY19: GBP382m). Underlying operating profit of GBP411m (FY19: GBP441m) reflects statutory operating profit adjusted for recurring and non-recurring items. Recurring items of GBP53m (FY19: GBP52m) comprise GBP33m amortisation of acquisition-related intangibles (FY19: GBP31m) and GBP20m of M&A related charges (FY19: GBP21m).

Non-recurring items include a GBP141m net gain on disposal of subsidiaries (FY19: GBP28m gain), comprising a GBP193m gain on the disposal of Sage Pay and a GBP52m loss on disposal of the Brazilian business (of which GBP44m reflects the non-cash reclassification of foreign exchange losses from other comprehensive income to the income statement). This is offset by a GBP19m non-cash charge relating to goodwill impairment in respect of our Asia business, costs relating to our property restructuring programme of GBP21m (FY19: GBP16m), and non-cash accelerated depreciation related to the relocation of our North Park office in Newcastle of GBP33m (FY19: GBP12m). In addition, restructuring charges of GBP22m were incurred in FY20, reflecting the continued de-prioritisation of low margin professional services.

Organic operating profit of GBP391m (FY19: GBP406m) reflects underlying operating profit adjusted for operating profit attributable to businesses sold during the period, including GBP4m from Sage Pay (FY19: GBP14m), and GBP1m from the Brazilian business (FY19: GBP2m). There were no material adjustments in respect of the other disposals, which were approximately breakeven at an operating profit level. There is a further adjustment of GBP15m relating to assets held for sale, which reflects GBP7m of profit in relation to the International segment (FY19: GBP6m) and GBP8m of profit in relation to the Central and Southern Europe segment (FY19: GBP12m).

Organic Revenue Overview

 
 Organic Revenue Mix                   FY20                     FY19             % Change 
                                    GBPm   % of Total        GBPm        GBPm   % of Total 
                             -----------  -----------  ----------  ----------  ----------- 
 Software Subscription 
  Revenue                      GBP1,141m          65%     GBP947m   GBP1,141m          65% 
 Other Recurring Revenue         GBP451m          25%     GBP521m     GBP451m          25% 
                             -----------  -----------  ----------  ----------  ----------- 
 Organic Recurring Revenue     GBP1,592m          90%   GBP1,468m   GBP1,592m          90% 
 Other Revenue                   GBP176m          10%     GBP237m     GBP176m          10% 
                             -----------  -----------  ----------  ----------  ----------- 
 Organic Total Revenue         GBP1,768m         100%   GBP1,705m   GBP1,768m         100% 
                             -----------  -----------  ----------  ----------  ----------- 
 

Organic total revenue increased by 4% in FY20 to GBP1,768m. Organic recurring revenue grew by 8% to GBP1,592m, underpinned by a 21% increase in software subscription revenue to GBP1,141m, 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 13% to GBP451m reflects the substitution effect as customers migrate to subscription contracts. Other revenue (SSRS and processing) declined by 26% to GBP176m, in line with our strategy to transition to subscription revenue and away from licence sales and professional services implementations. As expected, this reduction accelerated in the second half due to the impact of COVID-19.

In the portfolio view of revenue, the Future Sage Business Cloud Opportunity delivered recurring revenue growth of 10% to GBP1,415m and total revenue growth of 5% to GBP1,550m, 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 GBP177m, and total revenue decreased by 6% to GBP218m.

North America

 
 Organic Revenue by Category           FY20      FY19     % Change 
 Organic Total Revenue                GBP692m   GBP641m     +8% 
 Organic Recurring Revenue            GBP634m   GBP572m     +11% 
 
 % Subscription Penetration             61%       56%     +5 ppts 
 % Sage Business Cloud Penetration      71%       66%     +5 ppts 
                                     --------  --------  --------- 
 Organic Recurring Revenue             FY20      FY19     % Change 
                                     --------  --------  --------- 
 US (excluding Sage Intacct)          GBP397m   GBP372m     +7% 
 Canada                               GBP93m    GBP86m      +8% 
 Sage Intacct                         GBP144m   GBP114m     +26% 
                                     --------  --------  --------- 
 

North America delivered recurring revenue growth of 11% to GBP634m and total revenue growth of 8% to GBP692m. Subscription penetration is now 61%, up from 56% in the prior year, and Sage Business Cloud penetration is now 71%, up from 66% in the prior year, driven by growth in cloud native and cloud connected solutions.

Strong cloud native growth was driven through Sage Intacct, which delivered recurring revenue growth of 26% to GBP144m reflecting continued strong progress in North America through both new customer acquisition and existing customers.

The US (excluding Sage Intacct) increased recurring revenue by 7% to GBP397m and total revenue by 4% to GBP443m, supported by continued momentum in small and medium Sage Business Cloud products together with continued new customer acquisition during the year.

In Canada, recurring revenue increased by 8% to GBP93m and total revenue by 4% to GBP99m, driven by growth in Sage 50 cloud, as Sage Business Cloud penetration continues to build.

Northern Europe

 
 Organic Revenue by Category           FY20      FY19     % Change 
 Organic Total Revenue                GBP395m   GBP371m     +6% 
 Organic Recurring Revenue            GBP377m   GBP345m     +9% 
 
 % Subscription Penetration             85%       70%     +15 ppts 
 % Sage Business Cloud Penetration      82%       67%     +15 ppts 
                                     --------  --------  --------- 
 

Northern Europe (UK & Ireland) delivered recurring revenue growth of 9% to GBP377m and total revenue growth of 6% to GBP395m. Subscription penetration is 85%, up from 70% in the prior year, and Sage Business Cloud penetration is now 82%, up from 67% in the prior year.

Recurring revenue growth largely reflects continued success in cloud connected accounting and payroll solutions, driven by new customer acquisition together with momentum carried into the year.

Cloud native revenue growth in Northern Europe was driven by Sage Accounting and Sage People and supported by the recent acquisitions of Auto Entry and CakeHR. Sage Intacct has grown rapidly in the UK since it was launched in November 2019, and is building a good momentum in new contract wins. The pace of Sage Accounting growth has also accelerated following the launch of Sage Accounting Plus in May.

Central & Southern Europe

 
 Organic Revenue by Category           FY20      FY19     % Change 
 Organic Total Revenue                GBP544m   GBP556m     -2% 
 Organic Recurring Revenue            GBP467m   GBP448m     +4% 
 
 % Subscription Penetration             55%       46%     +9 ppts 
 % Sage Business Cloud Penetration      40%       27%     +13 ppts 
                                     --------  --------  --------- 
 Organic Recurring Revenue             FY20      FY19     % Change 
                                     --------  --------  --------- 
 France                               GBP246m   GBP237m     +4% 
 Central Europe                       GBP97m    GBP91m      +6% 
 Iberia                               GBP124m   GBP120m     +3% 
                                     --------  --------  --------- 
 

Central and Southern Europe delivered recurring revenue growth of 4% to GBP467m while total revenue decreased by 2% to GBP544m. Subscription penetration is now 55%, up from 46% in the prior year and Sage Business Cloud penetration is 40%, up from 27% in the prior year, largely driven by growth in cloud connected solutions. This excludes revenues from assets held for sale as at the year-end, which include our businesses in Poland and Switzerland.

France delivered recurring revenue growth of 4% to GBP246m, driven by a strong performance in Sage Business Cloud, with particular strength in cloud connected products and accelerated growth in cloud native solutions including X3 cloud. Total revenue in France decreased by 1% to GBP273m.

Central Europe delivered recurring revenue growth of 6% to GBP97m while total revenue decreased by 2% to GBP127m. Growth in the region is driven by a combination of cloud connected solutions and local products.

Iberia delivered recurring revenue growth of 3% to GBP124m, while total revenue decreased by 5% to GBP144m. Growth in recurring revenue has been driven mainly by Sage 50 and Sage 200 cloud connected solutions.

International

 
 Organic Revenue by Category           FY20      FY19     % Change 
 Organic Total Revenue                GBP137m   GBP137m      0% 
 Organic Recurring Revenue            GBP114m   GBP103m     +11% 
 
 % Subscription Penetration             62%       53%     +9 ppts 
 % Sage Business Cloud Penetration      14%       11%     +3 ppts 
                                     --------  --------  --------- 
 Organic Recurring Revenue             FY20      FY19     % Change 
                                     --------  --------  --------- 
 Africa & Middle East                 GBP101m   GBP90m      +12% 
                                     --------  --------  --------- 
 Australia & Asia                     GBP13m    GBP13m      +3% 
                                     --------  --------  --------- 
 

International delivered recurring revenue growth of 11% to GBP114m and total revenue in line with last year at GBP137m. Subscription penetration is now 62%, up from 53% in the prior year and Sage Business Cloud penetration in the region is 14%, up from 11% in the prior year. This excludes revenues from assets held for sale as at the year-end, including Sage's businesses in Asia and Australia (excluding global products that are core to Sage's strategy such as Sage Intacct, Sage People and Sage X3), and Sage's South African payroll outsourcing business.

Africa & Middle East, representing almost 90% of the International region's revenue, delivered strong recurring revenue growth of 12% to GBP101m, driven by local products and cloud native solutions, with particularly strong growth in Sage Accounting. Total revenue in Africa & Middle East was in line with last year at GBP118m.

The remainder of the International region comprises the remaining assets in Asia and Australia, where growth was driven by cloud native solutions in Australia, principally Sage Intacct and Sage People.

Operating Profit

The Group achieved organic operating profit of GBP391m (FY19: GBP406m), representing a margin of 22.1% (FY19: 23.8%). This margin reflects continued investment to drive strategic execution, particularly in technology and innovation, and includes a GBP17m charge to provide for potential bad debts in connection with COVID-19.

Underlying operating profit was GBP411m (FY19: GBP441m), representing a margin of 21.6% (FY19: 23.2%). The difference between organic and underlying operating profit reflects the operating profits of the assets held for sale at the end of the year and the assets sold during the year (Sage Pay and the Brazilian business).

EBITDA was GBP498m (FY19: GBP502m) representing an EBITDA margin of 26.2%. This reflects a GBP25m increase in depreciation due to the adoption of IFRS 16 from 1 October 2019.

 
                                  FY20       FY19     FY20 Margin 
                                                           % 
 Organic Operating Profit       GBP391m    GBP406m       22.1% 
 Impact of disposals             GBP5m      GBP16m 
 Impact of held for sale         GBP15m     GBP18m 
 Impact of acquisitions            -        GBP1m 
 Underlying Operating Profit    GBP411m    GBP441m       21.6% 
 Depreciation & amortisation     GBP58m     GBP35m 
 Share based payments            GBP29m     GBP26m 
                               ---------  ---------  ------------ 
 EBITDA                         GBP498m    GBP502m       26.2% 
                               ---------  ---------  ------------ 
 

Net Finance Cost

The statutory net finance cost for the period increased to GBP31m (FY19: GBP21m), reflecting interest charges on lease liabilities in connection with IFRS 16 and FX movements. The underlying net finance cost was GBP25m (FY19: GBP23m).

Taxation

The underlying tax expense for FY20 was GBP87m (FY19: GBP114m), resulting in an underlying tax rate of 23% (FY19: 27%). The statutory income tax expense for FY20 was GBP63m (FY19: GBP95m), resulting in a statutory tax rate of 17% (FY19: 26%).

The difference between the underlying and statutory rate in FY20 primarily reflects a non-taxable accounting net gain on the disposal of subsidiaries (Sage Pay and the Brazilian business), offset by non-tax-deductible charges 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.

The FY20 underlying tax rate has reduced primarily as a result of the new French patent box regime, and certain other adjustments in France and Germany.

Earnings per Share

 
                                           FY20      FY19   % Change 
 Statutory Basic EPS                     28.38p    24.49p     +15.9% 
 Recurring items                          4.57p     3.55p 
 Non-recurring items                    (5.52p)     0.37p 
 Impact of foreign exchange                   -   (0.53p) 
                              ----------------- 
 Underlying Basic EPS                    27.43p    27.88p      -1.6% 
                              ----------------- 
 

Underlying basic earnings per share of 27.43p was 2% lower than the prior period (FY19: 27.88p), reflecting the decrease in underlying operating profit, partly offset by the reduction in underlying tax rate.

Statutory basic earnings per share increased by 16%, primarily due to the increase in non-recurring profit related to the net gain on disposal of subsidiaries.

Cash Flow

The Group remains highly cash generative with underlying cash flow from operations of GBP505m (FY19: GBP577m), representing an underlying cash conversion of 123% (FY19: 129%). Importantly, the Group has now delivered cash conversion in excess of 100% for two years, demonstrating the robustness of the business model.

 
 Cash Flow APMs                                  FY20     FY19 (as reported) 
 Underlying operating profit                   GBP411m         GBP448m 
 Depreciation, amortisation and non-cash        GBP56m          GBP33m 
  items in profit 
 Share based payments                           GBP29m          GBP26m 
 Net changes in working capital                 GBP45m         GBP108m 
 Net capital expenditure                       (GBP36m)        (GBP38m) 
                                              ---------  ------------------- 
 Underlying Cash Flow from Operations          GBP505m         GBP577m 
                                              ---------  ------------------- 
     Underlying cash conversion %                123%            129% 
 
 Non-recurring cash items                      (GBP4m)         (GBP24m) 
 Net interest paid                             (GBP26m)        (GBP21m) 
 Income tax paid                               (GBP93m)        (GBP88m) 
 Profit and loss foreign exchange movements       -            (GBP1m) 
                                              ---------  ------------------- 
 Free Cash Flow                                GBP382m         GBP443m 
                                              ---------  ------------------- 
 
 
 Statutory Reconciliation of Cash Flow     FY20     FY19 (as reported) 
  from Operations 
 Statutory Cash Flow from Operations     GBP527m         GBP586m 
 Recurring and non-recurring items        GBP14m          GBP29m 
 Net capital expenditure                 (GBP36m)        (GBP38m) 
 Underlying Cash Flow from Operations    GBP505m         GBP577m 
 

The Group generated GBP505m of underlying cash from operations in FY20, representing cash conversion of 123%, the second consecutive year that the Group delivered cash conversion in excess of 100%. The strong performance in FY20 reflects the continued growth in software subscription and sustained improvements in working capital, with particular success in the collection of receivables during the year. Underlying cash conversion is expected to trend down in FY21.

Free cash flow was GBP382m (FY19: GBP443m), largely reflecting continued strong underlying cash conversion, together with a reduction in non-recurring cash items.

Group net debt was GBP151m at 30 September 2020 (30 September 2019: GBP393m), comprising cash and cash equivalents of GBP848m (30 September 2019: GBP372m) and total debt of GBP999m (30 September 2019: GBP765m). The decrease in net debt in the period is mostly attributable to strong free cash flow of GBP382m and net proceeds from disposals of GBP202m, offset by GBP186m paid in dividends during the year, and the recognition of GBP136m of lease liabilities on the balance sheet on adoption of IFRS 16 at 1 October 2019, as well as a further GBP30m of lease liabilities recognised in the year.

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 GBP200m was put in place in September 2019 and expires in September 2022, having been extended by a year in September 2020. The Group's RCF expires in February 2025 (having been extended by one year in February 2020) with facility levels of GBP692m (split between US$719m and GBP135m tranches). At 30 September 2020, GBP294m (FY19: GBP45m) of the multi-currency revolving debt facility was drawn and the Term Loan was fully drawn (FY19: fully drawn).

The Group's total USPP loan notes at 30 September 2020 were GBP387m (US$400m and EUR85m) (FY19: US$550m and EUR85m). The remaining USPP loan notes have a range of maturities between January 2022 and May 2025. In May 2020, US$150m of USPP loan notes matured and were repaid using cash on hand.

Maturities within the next 18 months comprise EUR 55 million (GBP50 million) of the Group's US private placement loan notes in January 2022.

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 management's focus on core competencies within the business, the disposal of Sage Pay and the Brazilian business were completed during the year and additional non-core assets were classified as held for sale at the year end.

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 during the year, and continued strong liquidity position, we have increased the full year dividend by 2% to 17.25p, including a final dividend of 11.32p.

The Group will also consider making additional capital returns to shareholders if appropriate. During the year, Sage announced on 6 April 2020 the cancellation of the previously announced GBP250m share buy-back programme, after GBP7m of shares had been purchased. This decision was taken to support the Group's financial strength in light of the COVID-19 pandemic.

 
                                 FY20     FY19 (as reported) 
 Net debt                       GBP151m        GBP393m 
 EBITDA (Last Twelve Months)    GBP498m        GBP509m 
                               --------  ------------------- 
 Net debt/EBITDA Ratio           0.3x            0.8x 
                               --------  ------------------- 
 

Group net debt as at 30 September 2020 was GBP151m and reported EBITDA over the last 12 months was GBP498m, resulting in a net debt to EBITDA ratio of 0.3x. Group return on capital employed (ROCE) for FY20 was 20% (FY19 as reported: 21%).

The Group adopted IFRS 16 with effect from 1 October 2019. This resulted in the recognition on the balance sheet of additional financial liabilities of GBP122m as at the year end, which has increased net debt to EBITDA in FY20 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 0.3x.

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 30 September 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 25.

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:

 
 AVERAGE EXCHANGE RATES (EQUAL TO    FY20    FY19    Change 
  GBP) 
 Euro (EUR)                          1.14    1.13      1% 
 US Dollar ($)                       1.28    1.28      - 
 South African Rand (ZAR)            20.67   18.30    13% 
 Australian Dollar (A$)              1.88    1.81      4% 
 Brazilian Real (R$)                 6.15    4.93     25% 
                                    ------  ------  ------- 
 

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.

 
 MEASURE              DESCRIPTION                                               RATIONALE 
 Underlying           Underlying measures are adjusted                          Underlying measures allow 
  (revenue             to exclude items which would                              management and investors 
  and profit)          distort the understanding                                 to compare performance without 
  measures             of the performance for the                                the potentially distorting 
                       year or comparability between                             effects of foreign exchange 
                       periods:                                                  movements, one-off or non-operational 
                       - Recurring items include                                 items. 
                       purchase price adjustments 
                       including amortisation of                                 By including part-period 
                       acquired intangible assets                                contributions from acquisitions, 
                       and adjustments made to reduce                            discontinued operations, 
                       deferred income arising on                                disposals and assets held 
                       acquisitions, acquisition-related                         for sale of standalone businesses 
                       items, FX on intercompany                                 in the current and/or prior 
                       balances and fair value adjustments;                      periods, the impact of M&A 
                       and                                                       decisions on earnings per 
                       - Non-recurring items that                                share growth can be evaluated. 
                       management judge to be one-off 
                       or non-operational such as 
                       gains and losses on the disposal 
                       of assets, impairment charges 
                       and reversals, and restructuring 
                       related costs. 
                       All prior period underlying 
                       measures (revenue and profit) 
                       are retranslated at the current 
                       year exchange rates to neutralise 
                       the effect of currency fluctuations. 
                     --------------------------------------------------------  --------------------------------------- 
 Organic (revenue     In addition to the adjustments                            Organic measures allow management 
  and profit)          made for Underlying measures,                             and investors to understand 
  measures             Organic measures:                                         the like-for-like revenue 
                       - Exclude the contribution                                and current period margin 
                       from discontinued operations,                             performance of the continuing 
                       disposals and assets held                                 business. 
                       for sale of standalone businesses 
                       in the current and prior 
                       period; and 
                       - Exclude the contribution 
                       from acquired businesses 
                       until the year following 
                       the year of acquisition; 
                       and 
                       - Adjust the comparative 
                       period to present prior period 
                       acquired businesses as if 
                       they had been part of the 
                       Group throughout the prior 
                       period. 
                       Acquisitions and disposals 
                       where the revenue and contribution 
                       impact would be immaterial 
                       are not adjusted. 
                     --------------------------------------------------------  --------------------------------------- 
 Underlying           Underlying Cash Flow from                                 To show the cashflow generated 
  Cash Flow            Operations is Underlying                                  by the operations and calculate 
  from Operations      Operating Profit adjusted                                 underlying cash conversion. 
                       for non-cash items, net capex 
                       (excluding business combinations 
                       and similar items) and changes 
                       in working capital. 
                     --------------------------------------------------------  --------------------------------------- 
 Underlying           Underlying Cash Flow from                                 Cash conversion informs management 
  Cash Conversion      Operations divided by Underlying                          and investors about the cash 
                       (as reported) Operating Profit.                           operating cycle of the business 
                                                                                 and how efficiently operating 
                                                                                 profit is converted into 
                                                                                 cash. 
                     --------------------------------------------------------  --------------------------------------- 
 EBITDA               EBITDA is Underlying Operating                            To calculate the Net Debt 
                       Profit excluding depreciation,                            to EBITDA leverage ratio 
                       amortisation and share based                              and to show profitability 
                       payments.                                                 before the impact of major 
                                                                                 non-cash charges. 
                     --------------------------------------------------------  --------------------------------------- 
 Annualised           Annualised recurring revenue                              ARR represents the annualised 
  recurring            ("ARR") is the normalised                                 value of the recurring revenue 
  revenue              organic recurring revenue                                 base that is expected to 
                       in the last month of the                                  be carried into future periods, 
                       reporting period, adjusted                                and its growth is a forward-looking 
                       consistently period to period,                            indicator of reporting recurring 
                       multiplied by twelve. Adjustments                         revenue growth. 
                       to normalise reported recurring 
                       revenue include those components 
                       that management has assessed 
                       should be excluded in order 
                       to ensure the measure reflects 
                       that part of the contracted 
                       revenue base which (subject 
                       to ongoing use and renewal) 
                       can reasonably be expected 
                       to repeat in future periods 
                       (such as non-refundable contract 
                       sign-up fees). 
                     --------------------------------------------------------  --------------------------------------- 
 Renewal Rate         The ARR from renewals, migrations,                        As an indicator of our ability 
  by Value             upsell and cross-sell of                                  to retain and generate additional 
                       active customers at the start                             revenue from our existing 
                       of the year, divided by the                               customer base through up 
                       opening ARR for the year.                                 and cross sell. 
                     --------------------------------------------------------  --------------------------------------- 
 Free Cash            Free Cash Flow is Cash Flow                               To measure the cash generated 
  Flow                 from Operations minus non-recurring                       by the operating activities 
                       cash items, interest paid,                                during the period that is 
                       tax paid and adjusted for                                 available to repay debt, 
                       profit and loss foreign exchange                          undertake acquisitions or 
                       movements.                                                distribute to shareholders. 
                     --------------------------------------------------------  --------------------------------------- 
 % Subscription       Organic software subscription                             To measure the progress of 
  Penetration          revenue as a percentage of                                migrating our customer base 
                       organic total revenue.                                    from licence and maintenance 
                                                                                 to a subscription relationship. 
                     --------------------------------------------------------  --------------------------------------- 
 % Sage Business      Organic recurring revenue                                 To measure the progress in 
  Cloud Penetration    from the Sage Business Cloud                              the migration of our revenue 
                       (native and connected cloud)                              base to the Sage Business 
                       as a percentage of the organic                            Cloud by connecting our solutions 
                       recurring revenue of the                                  to the cloud and/or migrating 
                       Future Sage Business Cloud                                our customers to cloud connected 
                       Opportunity.                                              and cloud native solutions. 
                     --------------------------------------------------------  --------------------------------------- 
 Return on            ROCE is calculated as:                                    As an indicator of the current 
  Capital Employed      *    Underlying Operating Profit; minus                  period financial 
  (ROCE)                                                                         return on the capital invested 
                                                                                 in the company. 
                        *    Amortisation of acquired intangibles; the result    ROCE is used as an underpin 
                             being divided by                                    in the FY19 and FY20 PSP 
                                                                                 awards. 
 
                       The average (of the opening 
                       and closing balance for the 
                       period) total net assets 
                       excluding net debt, provisions 
                       for non-recurring costs and 
                       tax assets or liabilities 
                       (i.e. capital employed). 
                     --------------------------------------------------------  --------------------------------------- 
 

Consolidated income statement

For the year ended 30 September 2020

 
 
 
                                                  Adjustments                              Adjustments 
                                    Underlying       (note 3)                                 (note 3) 
                                                                              Underlying 
                                                                Statutory   as reported*                  Statutory 
                                          2020           2020        2020           2019          2019         2019 
                             Note         GBPm           GBPm        GBPm           GBPm          GBPm         GBPm 
===========================  ====  ===========  =============  ==========  =============  ============  =========== 
Revenue                       2          1,903              -       1,903          1,936             -        1,936 
Cost of sales                            (126)              -       (126)          (138)             -        (138) 
===========================  ====  ===========  =============  ==========  =============  ============  =========== 
Gross profit                             1,777              -       1,777          1,798             -        1,798 
Selling and administrative 
 expenses                              (1,366)            (7)     (1,373)        (1,350)          (66)      (1,416) 
Operating profit              2            411            (7)         404            448          (66)          382 
Finance income                               3              -           3              6             2            8 
Finance costs                             (28)            (6)        (34)           (29)             -         (29) 
===========================  ====  ===========  =============  ==========  =============  ============  =========== 
Profit before 
 income tax                                386           (13)         373            425          (64)          361 
Income tax expense            4           (87)             24        (63)          (116)            21         (95) 
===========================  ====  ===========  =============  ==========  =============  ============  =========== 
Profit for the 
 year                                      299             11         310            309          (43)          266 
---------------------------  ----  -----------  -------------  ----------  -------------  ------------  ----------- 
 
 
 
Earnings per share attributable 
 to the owners of the parent 
 (pence) 
Basic                         6         27.43p                     28.38p         28.40p                     24.49p 
Diluted                       6         27.21p                     28.15p         28.17p                     24.29p 
===========================  ====  ===========  =============  ==========  =============  ============  =========== 
 

All operations in the year relate to continuing operations.

Note:

* Underlying as reported is at 2019 reported exchange rates.

Consolidated statement of comprehensive income

For the year ended 30 September 2020

 
                                                                                        2020   2019 
                                                                                        GBPm   GBPm 
=====================================================================================  =====  ===== 
Profit for the year                                                                      310    266 
Other comprehensive (expense)/income: 
Items that will not be reclassified to profit or loss 
Actuarial loss on post-employment benefit obligations                                      -    (1) 
                                                                                           -    (1) 
=====================================================================================  =====  ===== 
 
Items that may be reclassified to profit or loss 
Exchange differences on translating foreign operations                                  (43)     42 
Exchange differences recycled through income statement on sale of foreign operations      43    (4) 
                                                                                           -     38 
=====================================================================================  =====  ===== 
 
Other comprehensive income for the year, net of tax                                        -     37 
=====================================================================================  =====  ===== 
 
Total comprehensive income for the year                                                  310    303 
=====================================================================================  =====  ===== 
 
 

The notes on pages 24 to 45 form an integral part of this condensed consolidated yearly report.

Consolidated balance sheet

As at 30 September 2020

 
 
                                                                                 2019 
                                                                    2020    Restated* 
                                                          Note      GBPm         GBPm 
=======================================================  =====  ========  =========== 
 Non-current assets 
 Goodwill                                                  7       1,962        2,083 
 Other intangible assets                                   7         212          245 
 Property, plant and equipment                             7         173          117 
 Other financial assets                                                1            4 
 Trade and other receivables                                          86           73 
 Deferred income tax assets                                           35           31 
                                                                   2,469        2,553 
=======================================================  =====  ========  =========== 
 Current assets 
 Trade and other receivables                                         302          364 
 Current income tax asset                                              5            3 
 Cash and cash equivalents (excluding bank overdrafts)     10        831          371 
 Assets classified as held for sale                        11        108           63 
=======================================================  =====  ========  =========== 
                                                                   1,246          801 
=======================================================  =====  ========  =========== 
 
 Total assets                                                      3,715        3,354 
=======================================================  =====  ========  =========== 
 
 Current liabilities 
 Trade and other payables                                          (297)        (291) 
 Current income tax liabilities                                     (13)         (32) 
 Borrowings                                                         (20)        (122) 
 Provisions                                                         (19)         (11) 
 Deferred income                                                   (593)        (637) 
 Liabilities classified as held for sale                   11       (73)         (33) 
=======================================================  =====  ========  =========== 
                                                                 (1,015)      (1,126) 
=======================================================  =====  ========  =========== 
 
 Non-current liabilities 
 Borrowings                                                        (970)        (643) 
 Post-employment benefits                                           (23)         (25) 
 Deferred income tax liabilities                                    (14)         (26) 
 Provisions                                                         (31)         (15) 
 Trade and other payables                                            (3)          (7) 
 Deferred income                                                     (7)          (8) 
=======================================================  =====  ========  =========== 
                                                                 (1,048)        (724) 
=======================================================  =====  ========  =========== 
 
 Total liabilities                                               (2,063)      (1,850) 
=======================================================  =====  ========  =========== 
 Net assets                                                        1,652        1,504 
=======================================================  =====  ========  =========== 
 
 Equity attributable to owners of the parent 
 Ordinary shares                                           9          12           12 
 Share premium                                             9         548          548 
 Translation reserve                                                 123          123 
 Merger reserve                                                       61           61 
 Retained earnings                                                   908          760 
=======================================================  =====  ========  =========== 
 Total equity                                                      1,652        1,504 
=======================================================  =====  ========  =========== 
 

* 2019 restated for finalisation of the fair value of assets acquired and liabilities assumed in the acquisition of Ocrex Limited, completed in 2019 (see notes 1 and 11)

Consolidated statement of changes in equity

For the year ended 30 September 2020

 
                                                                                              Attributable to owners of the 
                                                                                                                     parent 
==============================================================  =========================================================== 
                                                                Ordinary    Share  Translation    Merger  Retained    Total 
                                                                  shares  premium      reserve  reserves  earnings   equity 
                                                                    GBPm     GBPm         GBPm      GBPm      GBPm     GBPm 
==============================================================  ========  =======  ===========  ========  ========  ======= 
At 1 October 2019 as originally 
 presented                                                            12      548          123        61       760    1,504 
==============================================================  ========  =======  ===========  ========  ========  ======= 
Adjustment on initial application 
 of IFRS 16 net of tax                                                 -        -            -         -       (7)      (7) 
At 1 October 2019 as adjusted                                         12      548          123        61       753    1,497 
==============================================================  ========  =======  ===========  ========  ========  ======= 
Profit for the year                                                    -        -            -         -       310      310 
Other comprehensive income/(expense) 
Exchange differences on translating 
 foreign operations                                                    -        -         (43)         -         -     (43) 
Exchange differences recycled through 
 income statement on sale of foreign 
 operations                                                            -        -           43         -         -       43 
Total comprehensive income 
 for the year ended 30 September 
 2020                                                                  -        -            -         -         -        - 
==============================================================  ========  =======  ===========  ========  ========  ======= 
Transactions with owners 
Employee share option scheme: 
 
        *    Value of employee services including deferred tax         -        -            -         -        29       29 
Proceeds from issuance of treasury 
 shares                                                                -        -            -         -         9        9 
Share buyback programme                                                -        -            -         -       (7)      (7) 
Dividends paid to owners of the 
 parent                                                                -        -            -         -     (186)    (186) 
==============================================================  ========  =======  ===========  ========  ========  ======= 
Total transactions with owners 
 for the year ended 30 September 
 2020                                                                  -        -            -         -     (155)    (155) 
==============================================================  ========  =======  ===========  ========  ========  ======= 
At 30 September 2020                                                  12      548          123        61       908    1,652 
==============================================================  ========  =======  ===========  ========  ========  ======= 
                                                                                              Attributable to owners of the 
                                                                                                                     parent 
==============================================================  =========================================================== 
                                                                Ordinary    Share  Translation    Merger  Retained    Total 
                                                                  shares  premium      reserve   reserve  earnings   equity 
                                                                    GBPm     GBPm         GBPm      GBPm      GBPm     GBPm 
==============================================================  ========  =======  ===========  ========  ========  ======= 
At 1 October 2018 as originally 
 presented                                                            12      548           85        61       621    1,327 
==============================================================  ========  =======  ===========  ========  ========  ======= 
Adjustment on initial application 
 of IFRS 15 net of tax                                                 -        -            -         -        24       24 
Adjustment on initial application 
 of IFRS 9 net of tax                                                  -        -            -         -       (5)      (5) 
==============================================================  ========  =======  ===========  ========  ========  ======= 
At 1 October 2018 as adjusted                                         12      548           85        61       640    1,346 
==============================================================  ========  =======  ===========  ========  ========  ======= 
Profit for the year                                                    -        -            -         -       266      266 
Other comprehensive income/(expense) 
Exchange differences on translating 
 foreign operations                                                    -        -           42         -         -       42 
Exchange differences recycled through 
 income statement on sale of foreign 
 operations                                                            -        -          (4)         -         -      (4) 
Actuarial loss on post-employment 
 benefit obligations                                                   -        -            -         -       (1)      (1) 
Total comprehensive income 
 for the year ended 30 September 
 2019                                                                  -        -           38         -       (1)       37 
==============================================================  ========  =======  ===========  ========  ========  ======= 
Transactions with owners 
Employee share option scheme: 
 
        *    Value of employee services including deferred tax         -        -            -         -        33       33 
Proceeds from issuance of treasury 
 shares                                                                -        -            -         -         3        3 
Dividends paid to owners of the 
 parent                                                                -        -            -         -     (181)    (181) 
==============================================================  ========  =======  ===========  ========  ========  ======= 
Total transactions with owners 
 for the year ended 30 September 
 2019                                                                  -        -            -         -     (145)    (145) 
==============================================================  ========  =======  ===========  ========  ========  ======= 
At 30 September 2019                                                  12      548          123        61       760    1,504 
==============================================================  ========  =======  ===========  ========  ========  ======= 
 
 

Consolidated statement of cash flows

For the year ended 30 September 2020

 
 
                                                        2020   2019 
                                                 Note   GBPm   GBPm 
===============================================  ====  =====  ===== 
Cash flows from operating activities 
Cash generated from continuing operations                527    586 
Interest paid                                           (28)   (26) 
Income tax paid                                         (93)   (88) 
Net cash generated from operating activities             406    472 
===============================================  ====  =====  ===== 
 
Cash flows from investing activities 
Acquisitions of subsidiaries, net of cash 
 acquired                                         11       -   (41) 
Investment in non-current asset                            -    (3) 
Disposal of subsidiaries, net of cash disposed    11     216     70 
Proceeds on settlement of equity investment                -     17 
Purchases of intangible assets                    7     (16)   (15) 
Purchases of property, plant and equipment        7     (24)   (27) 
Interest received                                          3      6 
Net cash generated from investing activities             179      7 
===============================================  ====  =====  ===== 
 
Cash flows from financing activities 
Proceeds from issuance of treasury shares         9        9      3 
Proceeds from borrowings                                 302    414 
Repayments of borrowings                               (167)  (594) 
Capital element of lease payments                       (38)      - 
Movements in cash held on behalf of customers              -   (78) 
Borrowing costs                                          (1)    (1) 
Share buyback programme                           9      (7)      - 
Dividends paid to owners of the parent            5    (186)  (181) 
Net cash used in financing activities                   (88)  (437) 
===============================================  ====  =====  ===== 
 
Net increase in cash, cash equivalents 
 and bank overdrafts 
 (before exchange rate movement)                         497     42 
Effects of exchange rate movement                 10    (21)      8 
Net increase in cash, cash equivalents 
 and bank overdrafts                                     476     50 
Cash, cash equivalents and bank overdrafts 
 at 1 October                                     10     372    322 
===============================================  ====  =====  ===== 
Cash, cash equivalents and bank overdrafts 
 at 30 September                                  10     848    372 
===============================================  ====  =====  ===== 
 
                                                        2020   2019 
                                                 Note   GBPm   GBPm 
===============================================  ====  =====  ===== 
Cash flows from operating activities 
Cash generated from continuing operations                527    586 
Interest paid                                           (28)   (26) 
Income tax paid                                         (93)   (88) 
Net cash generated from operating activities             406    472 
===============================================  ====  =====  ===== 
 
Cash flows from investing activities 
Acquisitions of subsidiaries, net of cash 
 acquired                                         11       -   (41) 
Investment in non-current asset                            -    (3) 
Disposal of subsidiaries, net of cash disposed    11     216     70 
Proceeds on settlement of equity investment                -     17 
Purchases of intangible assets                    7     (16)   (15) 
Purchases of property, plant and equipment        7     (24)   (27) 
Interest received                                          3      6 
Net cash generated from investing activities             179      7 
===============================================  ====  =====  ===== 
 
Cash flows from financing activities 
Proceeds from issuance of treasury shares         9        9      3 
Proceeds from borrowings                                 302    414 
Repayments of borrowings                               (167)  (594) 
Capital element of lease payments                       (38)      - 
Movements in cash held on behalf of customers              -   (78) 
Borrowing costs                                          (1)    (1) 
Share buyback programme                           9      (7)      - 
Dividends paid to owners of the parent            5    (186)  (181) 
Net cash used in financing activities                   (88)  (437) 
===============================================  ====  =====  ===== 
 
Net increase in cash, cash equivalents 
 and bank overdrafts 
 (before exchange rate movement)                         497     42 
Effects of exchange rate movement                 10    (21)      8 
Net increase in cash, cash equivalents 
 and bank overdrafts                                     476     50 
Cash, cash equivalents and bank overdrafts 
 at 1 October                                     10     372    322 
===============================================  ====  =====  ===== 
Cash, cash equivalents and bank overdrafts 
 at 30 September                                  10     848    372 
===============================================  ====  =====  ===== 
 

Notes to the financial information

For the year ended 30 September 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 .

The financial information set out above does not constitute the Company's Statutory Accounts for the year ended 30 September 2020 or 2019, but is derived from those accounts. Statutory Accounts for the year ended 30 September 2019 have been delivered to the Registrar of Companies and those for 2020 will be delivered in December 2020. The auditors have reported on both sets of accounts; their reports were 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 ("IFRS") as adopted by the European Union ("EU") and IFRS 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 2020.

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 consolidated financial statements of The Sage Group plc have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union ("EU") and IFRS as issued by the International Accounting Standards Board ("IASB"). IFRS as adopted by the EU differ in certain respects from IFRS as issued by the IASB. The differences have no impact on the Group's consolidated financial statements for the years presented.

The consolidated financial statements have been prepared under the historical cost convention, except where adopted IFRS require an alternative treatment. The principal variations from the historical cost convention relate to derivative financial instruments which are measured at fair value through profit or loss. The financial statements of the Group comprise the financial statements of the Company and entities controlled by the Company (its subsidiaries) prepared at the end of the reporting period. The accounting policies have been consistently applied across the Group. The Company controls an entity when it is exposed, or has rights, to variable returns from its involvement with the entity and has the ability to affect those returns through its power over the entity, which is usually from date of acquisition. The prior year consolidated balance sheet and related notes have been restated for the finalisation of provisional amounts recognised in respect of the fair value of assets acquired and liabilities assumed related to the acquisition of Ocrex Limited that completed on 27 September 2019. Details are set out in note 11.

The possible continuing and future impact of COVID-19 on the Group has been considered in the preparation of the 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 for the period to 31 March 2022, which reflect the expected impact of COVID-19 on trading. In addition to the Global Economic Shock severe but plausible scenario (part of the Group's Viability Statement assessment), further stress testing has been performed with the impact of more severe increases in churn and significantly reduced levels of new customer acquisition being considered. In these severe stress scenarios, the Group continues to have sufficient resources to continue in operational existence. In the event that more severe impacts occur, controllable mitigating actions are available to the Group should they be required.

The Directors also reviewed the results of reverse stress testing performed to provide an illustration of the level of churn and deterioration in new customer acquisition which would be required to trigger a breach in the Group's covenants or exhaust cash down to minimum working capital requirements. The probability of these factors occurring is deemed to be remote given the resilient nature of the subscription-based business model, robust balance sheet and continued strong cash conversion of the Group.

After making enquiries, the Directors have a reasonable expectation that Sage has adequate resources to continue in operational existence for at least 12 months from the date of signing these financial statements. Accordingly, the consolidated financial information has been prepared on a going concern basis.

All figures presented are rounded to the nearest GBPm, unless otherwise stated.

Accounting policies

The accounting policies adopted are consistent with those of the annual financial statements for the year ended 30 September 2020. During the year changes in policies relate to 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 the ability to substitute the available assets for others throughout the terms of the leases, and would benefit economically from doing so (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 HR Bakery 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

The impacts of IFRS 16 "Leases" and Amendments to IFRS 3 "Business Combinations: Definition of a Business" which became effective for the first time this financial year are detailed above. There are no other IFRS, IAS amendments or IFRIC interpretations effective for the first time this financial year that have had 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 GBP19m, which is the total value of goodwill in Asia.

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. Management have provided an additional GBP17m expected credit loss provision representing an additional 6% loss rate above historical rates.

Leases

Key judgements made in calculating the transition impact on the initial application of IFRS 16 include determining the lease term for property leases with extension or termination options and determining the incremental borrowing rates used as discount rates for property leases. For further information on the judgements made on the initial application of IFRS 16 to the Group's accounting for leases, see note 12.

Classification and measurement of businesses held for sale

As detailed in note 11, certain of the Group's businesses have been classified as businesses held for sale. Classification as held for sale requires judgements to be made on whether the qualifying criteria have been met. The Group considers these businesses to meet the criteria to be classified as held for sale for the following reasons:

 
 --   Management has approved the plans to sell these businesses; 
 --   The businesses are available for immediate sale; 
 --   The sales are expected to be completed within one year from 
       the date of initial classification; and 
 --   Active programmes to locate a buyer have been initiated and 
       the businesses are being marketed for sale at a sales price 
       reasonable in relation to its fair value. 
 

Website

This annual consolidated financial report for the year ended 30 September 2020 will be available on our website from 2 December 2020: 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 Monthly Business Reviews chaired by the Chief Operating 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 (eight following the disposal of the Brazilian businesses during the year): North America (excluding Intacct) (US and Canada), North America Sage 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 North America Sage 
       Intacct) and North America Sage 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, 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 North America Sage Intacct) and North America Sage 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 North America Sage Intacct) and North America Sage 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:

 
 Category            Examples 
 Recurring revenue   Subscription contracts 
                      Maintenance and support contracts 
==================  =================================== 
 Other revenue       Perpetual software licences 
                      Upgrades to perpetual licences 
                      Professional services 
                      Training 
                      Hardware and stationery 
                      Payment processing services 
                      Payroll processing services 
                    ----------------------------------- 
 

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

 
                                                                          Year ended 30 September 2020 
                                Statutory        Organic                 Change       Change    Change 
                           and Underlying   adjustments*    Organic   Statutory   Underlying   Organic 
                                     GBPm           GBPm       GBPm           %            %         % 
=====================    ================  =============  =========  ==========  ===========  ======== 
Recurring revenue by segment 
North America                         634              -        634       10.4%        10.5%     10.9% 
Northern Europe                       377              -        377       10.6%        10.7%      9.4% 
Central and Southern 
 Europe                               508           (41)        467        3.7%         4.2%      4.2% 
International                         175           (61)        114     (15.5%)       (4.9%)     10.7% 
=======================  ================  =============  =========  ==========  ===========  ======== 
Recurring revenue                   1,694          (102)      1,592        5.1%         6.8%      8.5% 
=======================  ================  =============  =========  ==========  ===========  ======== 
Other revenue by segment 
North America                          58              -         58     (30.0%)      (30.0%)   (15.6%) 
Northern Europe                        35           (17)         18     (46.6%)      (46.6%)   (32.8%) 
Central and Southern 
 Europe                                82            (5)         77     (30.3%)      (30.1%)   (28.9%) 
International                          34           (11)         23     (40.2%)      (34.4%)   (33.2%) 
=======================  ================  =============  =========  ==========  ===========  ======== 
Other revenue                         209           (33)        176     (35.3%)      (34.2%)   (26.1%) 
=======================  ================  =============  =========  ==========  ===========  ======== 
Total revenue by segment 
North America                         692              -        692        5.3%         5.4%      8.1% 
Northern Europe                       412           (17)        395        1.4%         1.4%      6.3% 
Central and Southern 
 Europe                               590           (46)        544      (2.9%)       (2.4%)    (2.2%) 
International                         209           (72)        137     (20.9%)      (11.5%)    (0.2%) 
=======================  ================  =============  =========  ==========  ===========  ======== 
Total revenue                       1,903          (135)      1,768      (1.7%)         0.0%      3.7% 
=======================  ================  =============  =========  ==========  ===========  ======== 
 
 

Revenue by segment (continued)

 
                                                                       Year ended 30 September 2019 
                                       Statutory         Impact 
                                  and Underlying     on foreign                    Organic 
                                     as reported       exchange  Underlying   adjustments*  Organic 
                                            GBPm           GBPm        GBPm           GBPm     GBPm 
=========================     ==================  =============  ==========  =============  ======= 
Recurring revenue by segment 
North America                                574              -         574            (2)      572 
Northern Europe                              341              -         341              4      345 
Central and Southern 
 Europe                                      490            (3)         487           (39)      448 
International                                207           (23)         184           (81)      103 
============================  ==================  =============  ==========  =============  ======= 
Recurring revenue                          1,612           (26)       1,586          (118)    1,468 
============================  ==================  =============  ==========  =============  ======= 
Other revenue by segment 
North America                                 83              -          83           (14)       69 
Northern Europe                               65              -          65           (39)       26 
Central and Southern 
 Europe                                      118            (1)         117            (9)      108 
International                                 58            (5)          53           (19)       34 
============================  ==================  =============  ==========  =============  ======= 
Other revenue                                324            (6)         318           (81)      237 
============================  ==================  =============  ==========  =============  ======= 
Total revenue by segment 
North America                                657              -         657           (16)      641 
Northern Europe                              406              -         406           (35)      371 
Central and Southern 
 Europe                                      608            (4)         604           (48)      556 
International                                265           (28)         237          (100)      137 
============================  ==================  =============  ==========  =============  ======= 
Total revenue                              1,936           (32)       1,904          (199)    1,705 
============================  ==================  =============  ==========  =============  ======= 
 
 

* Adjustments relate to the disposal of Sage Pay and the Group's Brazilian business and assets held for sale in the current year (note 11) and the acquisition of Ocrex Limited and disposal of Sage Payroll Solutions in the prior year.

Operating profit by segment

 
                                                                                             Year ended 30 September 
                                                                                                                2020 
---------------------  ---------  ------------  ----------  ------------  ------------------------------------------ 
                                    Underlying                   Organic               Change       Change    Change 
                       Statutory   adjustments  Underlying   adjustments  Organic   Statutory   Underlying   Organic 
                            GBPm          GBPm        GBPm          GBPm     GBPm           %            %         % 
=====================  =========  ============  ==========  ============  =======  ==========  ===========  ======== 
Operating profit 
 by segment 
North America                127            28         155             -      155      (0.4%)        17.1%     16.8% 
Northern Europe              266         (138)         128           (4)      124       98.5%      (18.1%)   (12.6%) 
Central and Southern 
 Europe                       65            34          99           (8)       91     (46.1%)      (22.2%)   (21.3%) 
International               (54)            83          29           (8)       21         n/a        18.4%     35.5% 
---------------------  =========  ============  ==========  ============  =======  ==========  ===========  ======== 
Total operating 
 profit                      404             7         411          (20)      391        5.8%       (6.7%)    (3.7%) 
=====================  =========  ============  ==========  ============  =======  ==========  ===========  ======== 
 
 
                                                                                       Year ended 30 September 
                                                                                                          2019 
-----------------  ---------  ------------  ------------  -----------  --------------------------------------- 
                                                               Impact 
                                Underlying    Underlying   of foreign                       Organic 
                   Statutory   adjustments   as reported     exchange      Underlying   adjustments    Organic 
                        GBPm          GBPm          GBPm         GBPm            GBPm          GBPm       GBPm 
=================  =========  ============  ============  ===========  ==============  ============  ========= 
Operating profit 
 by segment 
North America            128             5           133          (1)             132             -        132 
Northern Europe          134            23           157            -             157          (15)        142 
Central and 
 Southern 
 Europe                  120             9           129          (1)             128          (12)        116 
International              -            29            29          (5)              24           (8)         16 
-----------------  ---------  ============  ============  ===========  ==============  ============  ========= 
Total operating 
 Profit                  382            66           448          (7)             441          (35)        406 
=================  =========  ============  ============  ===========  ==============  ============  ========= 
 
 

Reconciliation of underlying operating profit to statutory operating profit

 
                                                           2020   2019 
                                                           GBPm   GBPm 
======================================================    =====  ===== 
North America                                               155    132 
Northern Europe                                             128    157 
Central and Southern Europe                                  99    128 
Total reportable segments                                   382    417 
International                                                29     24 
========================================================  =====  ===== 
Underlying operating profit                                 411    441 
Impact of movement in foreign currency exchange rates         -      7 
=======================================================   =====  ===== 
Underlying operating profit (as reported)                   411    448 
Amortisation of acquired intangible assets                 (33)   (31) 
Other M&A activity-related items                           (20)   (21) 
Non-recurring items                                          46   (14) 
========================================================  =====  ===== 
Statutory operating profit                                  404    382 
========================================================  =====  ===== 
 

3 Adjustments between underlying profit and statutory profit

 
                                   2020        2020    2020        2019        2019     2019 
                                               Non-                            Non- 
                              Recurring   recurring   Total   Recurring   recurring    Total 
                                   GBPm        GBPm    GBPm        GBPm        GBPm     GBPm 
===========================  ==========  ==========  ======  ==========  ==========  ======= 
M&A activity-related items 
Amortisation of acquired 
 intangibles                         33           -      33          31           -       31 
Net gain on disposal of 
 subsidiaries                         -       (141)   (141)           -        (28)     (28) 
Impairment of assets held 
 for sale                             -           -       -           -          14       14 
Other M&A activity-related 
 items                               20           -      20          21           -       21 
Other items 
Impairment of goodwill                -          19      19           -           -        - 
Restructuring costs                   -          22      22           -           -        - 
Property restructuring 
 costs                                -          21      21           -          16       16 
Office relocation                     -          33      33           -          12       12 
Total adjustments made 
 to operating profit                 53        (46)       7          52          14       66 
Foreign currency movements 
 on intercompany balances             6           -       6         (2)           -      (2) 
Total adjustments made 
 to profit before income 
 tax                                 59        (46)      13          50          14       64 
===========================  ==========  ==========  ======  ==========  ==========  ======= 
 

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 relate to completed transaction costs and include advisory, legal, accounting, valuation and other professional or consulting services as well as acquisition-related remuneration, directly attributable integration costs and any required provision for future selling costs for assets held for sale. GBP4m (2019: GBPnil) of these costs have been paid in the year while the remainder is expected to be paid in subsequent financial years. Further details can be found in note 11.

Foreign currency movements on intercompany balances of GBP6m (2019: credit of GBP2m) occur due to retranslation of intercompany balances other than those where settlement is not planned or likely in the foreseeable future. The balance arises in the current year due to fluctuation in exchange rates, predominantly the movement in Euro and US Dollar compared to sterling.

Non-recurring items

Net credit in respect of non-recurring items amounted to GBP46m (2019: charge of GBP14m).

Following challenging current trading and economic conditions in Asia, an impairment of the goodwill by GBP19m (2019: GBPnil) relating to the Asia group of CGUs has been recognised.

Restructuring costs of GBP22m (2019: GBPnil) are in relation to the changes in the Professional Services division across a number of geographic regions announced during the year reflecting the continued de-prioritisation of low margin professional services. GBP1m (2019: GBPnil) of these costs have been paid in the year while the remainder is expected to be paid in the subsequent financial year.

Property restructuring costs of GBP21m (2019: GBP16m) relate to the reorganisation of the Group's properties and consist of net lease exit costs, GBP2m of which was paid in cash, following consolidation of office space and GBP14m 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.

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

Details of net gain on disposal of subsidiaries can be found in note 11. In the current year, the net gain on disposal of subsidiaries relates to the disposal of Sage Pay (gain: GBP193m) and the Brazilian business (loss: GBP52m).

In the prior year, the GBP28m net gain on disposal of subsidiaries related to the sale of Sage Payroll Solutions and the Group's South African payments business.

The prior year impairment of assets held for sale related to the Brazilian business which was subsequently disposed of in the current year.

4 Income tax expense

The effective tax rate on statutory profit before tax was 17% (2019: 26%), whilst the effective tax rate on underlying profit before tax on continuing operations was 23% (2019: 27%).

The underlying effective tax rate was reduced in FY20 principally as a result of changes in the French patent box legislation and non-recurring adjustments in some of our operating territories.

The statutory effective tax rate was further reduced due to non-taxable accounting net gains on our FY20 dispositions, offset by non-tax-deductible charges 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.

5 Dividends

 
 
                                                       2020   2019 
                                                       GBPm   GBPm 
====================================================  =====  ===== 
Final dividend paid for the year ended 30 September 
 2019 of 11.12p per share                               121      - 
(2019: final dividend paid for the year ended 
 30 September 2018 of 10.85p per share)                   -    118 
 
Interim dividend paid for the year ended 30 
 September 2020 of 5.93p per share                       65      - 
(2019: interim dividend paid for the year ended 
 30 September 2019 of 5.79p per share)                    -     63 
                                                        186    181 
====================================================  =====  ===== 
 

In addition, the directors are proposing a final dividend in respect of the financial year ended 30 September 2020 of 11.32p per share which will absorb an estimated GBP124m of shareholders' funds. The Company's distributable reserves are sufficient to support the payment of this dividend. If approved by the AGM, it will be paid on 11 February 2021 to shareholders who are on the register of members on 15 January 2021. These financial statements do not reflect this proposed dividend payable.

6 Earnings per share

Basic earnings per share is calculated by dividing the profit for the year attributable to owners of the parent by the weighted average number of ordinary shares in issue during the year, excluding those held as treasury shares, which are treated as cancelled.

For diluted earnings per share, the weighted average number of ordinary shares in issue is adjusted to assume conversion of all potentially dilutive ordinary shares, exercisable at the end of the year. The Group has one class of dilutive potential ordinary shares. They are share options granted to employees where the exercise price is less than the average market price of the Company's ordinary shares during the year.

 
                                               Underlying 
                                Underlying   as reported*  Underlying    Statutory  Statutory 
                                      2020           2019        2019         2020       2019 
==============================  ==========  =============  ==========  ===========  ========= 
Earnings attributable to owners of 
 the parent 
 - Continuing operations (GBPm) 
Profit for the year                    299            309         303          310        266 
==============================  ==========  =============  ==========  ===========  ========= 
 
Number of shares (millions) 
Weighted average number 
 of shares                           1,091          1,086       1,086        1,091      1,086 
Dilutive effects of shares               9              9           9            9          9 
==============================  ==========  =============  ==========  ===========  ========= 
                                     1,100          1,095       1,095        1,100      1,095 
==============================  ==========  =============  ==========  ===========  ========= 
Earnings per share attributable to 
 owners of the 
 parent - Continuing operations (pence) 
Basic earnings per share             27.43          28.40       27.88        28.38      24.49 
==============================  ==========  =============  ==========  ===========  ========= 
Diluted earnings per share           27.21          28.17       27.65        28.15      24.29 
==============================  ==========  =============  ==========  ===========  ========= 
 

* Underlying as reported is at 2019 reported exchange rates.

 
 
                                                                                      2020   2019 
Reconciliation of earnings - Continuing operations                                    GBPm   GBPm 
===================================================================================  =====  ===== 
Underlying earnings attributable to owners of the parent (after exchange movement)     299    303 
Impact of movement in foreign currency exchange rates, net of taxation                   -      6 
===================================================================================  =====  ===== 
Underlying earnings attributable to owners of the parent (as reported)                 299    309 
Amortisation of acquired intangible assets                                            (33)   (31) 
Net gain on disposal of subsidiaries                                                   141     28 
Foreign currency movements on intercompany balances                                    (6)      2 
Other M&A activity-related items                                                      (20)   (21) 
Impairment of assets held for sale                                                       -   (14) 
Impairment of goodwill                                                                (19)      - 
Restructuring costs                                                                   (22)      - 
Property restructuring costs                                                          (21)   (16) 
Office relocation                                                                     (33)   (12) 
Taxation on adjustments between underlying and statutory profit before tax              24     21 
===================================================================================  =====  ===== 
Net adjustments                                                                         11   (43) 
===================================================================================  =====  ===== 
Earnings: statutory profit for the year                                                310    266 
===================================================================================  =====  ===== 
 

7 Non-current assets

 
                                                                 Other 
                                                            intangible  Property, plant 
                                                 Goodwill       assets    and equipment   Total 
                                                     GBPm         GBPm             GBPm    GBPm 
===============================================  ========  ===========  ===============  ====== 
Opening net book amount at 1 October 2019           2,083          245              117   2,445 
Impact of adoption of IFRS 16                           -            -              113     113 
Additions                                               -           19               57      76 
Disposals                                               -            -              (2)     (2) 
Transfer to held for sale                            (47)            -             (14)    (61) 
Depreciation, amortisation and other movements       (19)         (45)             (93)  ( 157) 
Exchange movement                                    (55)          (7)              (5)    (67) 
Closing net book amount at 30 September 2020        1,962          212              173   2,347 
===============================================  ========  ===========  ===============  ====== 
 
 
                                                                   Other 
                                                              intangible 
                                                   Goodwill       assets  Property, plant       Total 
                                                  *restated    *restated    and equipment   *restated 
                                                       GBPm         GBPm             GBPm        GBPm 
===============================================  ==========  ===========  ===============  ========== 
Opening net book amount at 1 October 2018             2,008          260              129       2,397 
Additions                                                26           15               27          68 
Acquisition                                               -           17                -          17 
Disposals                                                 3          (5)                -         (2) 
Transfer to held for sale                              (26)          (6)              (3)        (35) 
Depreciation, amortisation and other movements            -         (44)             (37)       ( 81) 
Exchange movement                                        72            8                1          81 
Closing net book amount at 30 September 2019          2,083          245              117       2,445 
===============================================  ==========  ===========  ===============  ========== 
 

*2019 restated for finalisation of the fair value of assets acquired and liabilities assumed in the acquisition of Ocrex in 2019.

Goodwill is not subject to amortisation, but is tested for impairment annually or upon any indication of impairment. At 30 September 2020, with the exception of the Asia group of CGUs, there were no indicators of impairment to goodwill. Full details of the outcome of the 2020 goodwill impairment review are provided in the 2020 financial statements.

Detail of the current period acquisitions and disposals has been provided in note 11.

8 Financial instruments

For financial assets and liabilities, the carrying amount approximates the fair value of the instruments, with the exception of US senior loan notes due to these bearing interest at fixed rates. The fair value of borrowings is determined by reference to interest rate movements on the US $ private placement market and therefore can be considered as a level 2 fair value as defined within IFRS 13. The book values and fair values of all borrowings, excluding lease liabilities, are included in the table below.

 
                         At 30 September 2020     At 30 September 2019 
                       ======================  ======================= 
                       Book Value  Fair Value   Book Value  Fair Value 
                             GBPm        GBPm         GBPm        GBPm 
=====================  ==========  ==========  ===========  ========== 
Long-term borrowing         (877)       (902)        (643)       (660) 
Short-term borrowing            -           -        (122)       (122) 
=====================  ==========  ==========  ===========  ========== 
 

9 Ordinary shares and share premium

 
                                                         Ordinary 
                                              Number of    Shares  Share premium  Total 
                                                 shares      GBPm           GBPm   GBPm 
========================================  =============  ========  =============  ===== 
At 1 October 2019 and 30 September 2020   1,120,789,295        12            548    560 
At 1 October 2018 and 30 September 2019   1,120,789,295        12            548    560 
========================================  =============  ========  =============  ===== 
 

During the year the Group agreed to satisfy the vesting of certain share awards, utilising a total of 4,956,977 (2019: 3,781,720) treasury shares.

During the year, the Employee Share Trust agreed to satisfy the vesting of certain share awards, utilising a total of 94,830 (2019: 368,733) shares held in the Trust. The Trust received GBPnil (2019: GBP2m) additional funds for future purchase of shares in the market.

10 Cash flow and net debt

 
 
                                                                                                2020   2019 
                                                                                                GBPm   GBPm 
=============================================================================================  =====  ===== 
Statutory operating profit - continuing operations                                               404    382 
Recurring and non-recurring items                                                                  7     66 
=============================================================================================  =====  ===== 
Underlying operating profit - as reported                                                        411    448 
Depreciation/amortisation/impairment /non-cash items                                              56     33 
Share-based payments                                                                              29     26 
Net changes in working capital                                                                    45    108 
Net capital expenditure                                                                         (36)   (38) 
Underlying cash flow from operating activities                                                   505    577 
Non-recurring cash items                                                                         (4)   (24) 
Net interest paid                                                                               (26)   (21) 
Income tax paid                                                                                 (93)   (88) 
Profit and loss foreign exchange movements                                                         -    (1) 
=============================================================================================  =====  ===== 
Free cash flow                                                                                   382    443 
Net debt at 1 October*                                                                         (529)  (668) 
Acquisitions and disposals of subsidiaries and similar transactions, net of cash and related 
 items                                                                                           202     35 
Dividends paid to owners of the parent                                                         (186)  (181) 
New leases                                                                                      (30)      - 
Share buyback programme                                                                          (7)      - 
Share issue                                                                                        9      3 
Exchange movement                                                                                  6   (24) 
Other                                                                                              2    (1) 
=============================================================================================  =====  ===== 
Net debt at 30 September                                                                       (151)  (393) 
=============================================================================================  =====  ===== 
 

*adjusted as at 1 October 2019 on adoption of IFRS16.

 
 
                                                  2020   2019 
                                                  GBPm   GBPm 
===============================================  =====  ===== 
Underlying cash flow from operating activities     505    577 
Recurring and non-recurring cash items*           (14)   (29) 
Net capital expenditure**                           36     38 
Statutory cash flow from operating activities      527    586 
===============================================  =====  ===== 
 

* cash paid from recurring and non-recurring items (note 3) charged in the year or in previous years.

** relates to purchases of property, plant and equipment and purchases of computer software intangible assets.

 
                                         Impact 
 Analysis of          At          At         of         Reclassif-ication    Disposal  Non-cash                  At 30 
 change in     1 October   1 October   adoption   Cash            as held          of     move-   Exchange   September 
 net                2018        2019    of IFRS   flow           for sale  subsidiary     ments   movement        2020 
 debt               GBPm        GBPm    16 GBPm   GBPm               GBPm        GBPm      GBPm       GBPm        GBPm 
============  ==========  ==========  =========  =====  =================  ==========  ========  =========  ========== 
Cash and 
 cash 
 equivalents         272         371          -    510               (17)        (12)         -       (21)         831 
Bank 
 overdrafts          (8)           -          -      -                  -           -         -          -           - 
Cash amounts 
 included in 
 held for 
 sale                 58           1          -      -                 17         (1)         -          -          17 
============  ==========  ==========  =========  =====  =================  ==========  ========  =========  ========== 
Cash, cash 
 equivalents 
 and bank 
 overdrafts 
 including 
 cash 
 as held for 
 sale                322         372          -    510                  -        (13)         -       (21)         848 
============  ==========  ==========  =========  =====  =================  ==========  ========  =========  ========== 
 
Liabilities 
arising from 
financing 
activities 
Loans due 
 within 
 one year              -       (122)          -    122                  -           -         -          -           - 
Loans due 
 after 
 more than 
 one 
 year              (913)       (643)          -  (256)                  -           -         -         22       (877) 
Cash held on 
 behalf of 
 customers          (19)           -          -      -                  -           -         -          -           - 
Cash held on 
 behalf of 
 customers 
 included in 
 held for 
 sale               (58)           -          -      -                  -           -         -          -           - 
Lease 
 liabilities 
 due within 
 one 
 year                  -           -       (29)     38                  2           -      (31)          -        (20) 
Lease 
 liabilities 
 after more 
 than 
 one year              -           -      (106)      -                  7           -         1          5        (93) 
Lease 
 liabilities 
 included in 
 held for 
 sale                  -           -        (1)      -                (9)           1         -          -         (9) 
                   (990)       (765)      (136)   (96)                  -           1      (30)         27       (999) 
============  ==========  ==========  =========  =====  =================  ==========  ========  =========  ========== 
 
Total              (668)       (393)      (136)    414                  -        (12)      (30)          6       (151) 
============  ==========  ==========  =========  =====  =================  ==========  ========  =========  ========== 
 

11 Acquisitions and disposals

Measurement adjustments to business combinations reported using provisional amounts

On 27 September 2019, the Group acquired 100% of the equity capital of Ocrex Limited ("Ocrex"), a company based in Ireland, for total consideration of GBP42m, paid in cash. Ocrex is a leading provider of data entry automation of accountants, bookkeepers and businesses through its main product, AutoEntry. The acquisition of Ocrex and AutoEntry allows the Group to accelerate its vision to become a software-as-a-service ("SaaS") company.

The net assets recognised in the financial statements at 30 September 2019 were based on a provisional assessment of their fair value while the Group undertook a valuation of the acquired intangible assets. The valuation had not been completed by the date the 2019 financial statements were approved for issue by the Board of Directors.

During the year, the valuation was approved and completed, and the acquisition date fair value of the intangible assets was GBP17m. The intangible assets identified and subsequently valued as at the date of acquisition include:

 
                          Valuation 
Summary of acquisition         GBPm  Useful life 
------------------------  ---------  ----------- 
Brands                            1      8 years 
Technology                       10      8 years 
Customer relationships            6      7 years 
------------------------  ---------  ----------- 
Total intangible assets          17 
------------------------  ---------  ----------- 
 

The 2019 comparative information was restated to reflect the adjustment to the provisional amounts. As a result of the recognition of intangible assets, there was an increase in the deferred tax liability of GBP2m. There was also a corresponding reduction in goodwill of GBP15m, resulting in GBP26m of total goodwill arising on the acquisition which comprises the fair value of the acquired control premium, work force in place and the expected synergies. The goodwill arising from the acquisition has been allocated to the Group's geographic cash-generating units ("CGUs") where the underlying benefit arising from the acquisition is expected to be realised. This is predominantly within the UK&I and North America regions. No goodwill is expected to be deductible for tax purposes.

As set out below, no other adjustments have been made to the provisional fair values of assets and liabilities which were reported at 30 September 2019.

 
                                 Previously reported 
                                    provisional fair   Measurement 
Fair value of identifiable net                values   adjustments  Final fair values 
 assets acquired                                GBPm          GBPm               GBPm 
-------------------------------  -------------------  ------------  ----------------- 
Intangible assets                                  -            17                 17 
Other identifiable net assets                      1             -                  1 
Deferred tax liability                             -           (2)                (2) 
-------------------------------  -------------------  ------------  ----------------- 
Fair value of identifiable net 
 assets acquired                                   1            15                 16 
Goodwill                                          41          (15)                 26 
-------------------------------  -------------------  ------------  ----------------- 
Total consideration                               42             -                 42 
-------------------------------  -------------------  ------------  ----------------- 
 

The increased amortisation charge on the intangible assets from the acquisition date to 30 September 2019 was not material, therefore no adjustment has been made for this.

No changes have been identified to the directly attributable acquisition related costs which were incurred during the financial year ended 30 September 2019 in relation to the acquisition.

Disposals made during the current year

On 11 March 2020, the Group completed the sale of Sage Pay, the group's European payments processing business, for total consideration of GBP241m. On 31 March 2020, the Group completed the sale of its Brazilian business for total consideration of GBP1m. The gains and losses on disposal are calculated as follows:

 
                                                                                              Sage Pay  Brazil  Total 
                                                                                                  2020    2020   2020 
Gain/(loss) on disposal                                                                           GBPm    GBPm   GBPm 
============================================================================================  ========  ======  ===== 
Cash consideration                                                                                 241       1    242 
Gross consideration                                                                                241       1    242 
Transaction costs                                                                                  (9)     (2)   (11) 
============================================================================================  ========  ======  ===== 
Net consideration                                                                                  232     (1)    231 
Net assets disposed                                                                               (40)     (7)   (47) 
Cumulative foreign exchange differences reclassified from other comprehensive income to the 
 income statement                                                                                    1    (44)   (43) 
Gain/(loss) on disposal                                                                            193    (52)    141 
============================================================================================  ========  ======  ===== 
 

Net assets disposed comprise:

 
                                 Sage Pay  Brazil  Total 
                                     2020    2020   2020 
                                     GBPm    GBPm   GBPm 
===============================  ========  ======  ===== 
Goodwill                               25       -     25 
Other intangible assets                 1       -      1 
Property, plant and equipment           2       -      2 
Deferred income tax asset               -       6      6 
Inventory                               1       -      1 
Trade and other receivables             6      11     17 
Cash and cash equivalents               9       4     13 
===============================  ========  ======  ===== 
Total assets                           44      21     65 
 
Trade and other payables              (3)     (4)    (7) 
Borrowings                              -     (1)    (1) 
Current income tax liabilities          -     (1)    (1) 
Provisions                              -     (1)    (1) 
Deferred income                       (1)     (7)    (8) 
Total liabilities                     (4)    (14)   (18) 
===============================  ========  ======  ===== 
 
Net assets                             40       7     47 
===============================  ========  ======  ===== 
 

The net gain is reported within continuing operations, as an adjustment between underlying and statutory results.

Prior to the disposals, Sage Pay formed part of the Group's Northern Europe reporting segment and the Brazilian business was part of the International segment. The net inflow of cash and cash equivalents on the disposal is calculated as follows:

 
                                                            Sage Pay  Brazil  Total 
                                                                2020    2020   2020 
                                                                GBPm    GBPm   GBPm 
==========================================================  ========  ======  ===== 
Cash consideration                                               241       1    242 
Transaction costs                                                (9)     (4)   (13) 
==========================================================  ========  ======  ===== 
Net consideration received                                       232     (3)    229 
Cash disposed                                                    (9)     (4)   (13) 
Inflow/(outflow) of cash and cash equivalents on disposal        223     (7)    216 
==========================================================  ========  ======  ===== 
 

Discontinued operations and assets and liabilities held for sale

The Group had no discontinued operations during the years ended 30 September 2020 or 30 September 2019.

Assets and liabilities held for sale at 30 September 2020 reflect four disposal groups which comprise part of the Group's businesses in the Asia Pacific region, Poland, Switzerland, and the payroll processing business in South Africa.

The Group's operations in the Asia Pacific region, which includes its subsidiaries in Australia, Malaysia and Singapore, form part of the International reportable segment. Poland and Switzerland form part of the Central and Southern Europe reportable segment. Where applicable, these disposal groups exclude certain global strategic product lines in these countries, such as Sage Intacct, Sage People and Sage X3. The payroll processing business in South Africa forms part of the International reporting segment.

The sales are expected to be finalised during the year ended 30 September 2021.

On classification of as held for sale, no adjustment was required to reduce the carrying value of the disposal groups down to fair value less costs to sell. Note that the fair value less costs to sell of the disposal groups held for sale was determined using observable inputs and estimates that required some adjustments using unobservable data, leading to level 3 classification when considering the fair value hierarchy under IFRS 13.

Assets and liabilities held for sale at 30 September 2019 relate to the Group's Sage Pay and Brazilian businesses which have been sold during the current year (see note 15.2). Assets and liabilities held for sale at 30 September 2020 comprise:

 
                                                                     Payroll processing 
                                                                               business 
                                Asia Pacific    Poland  Switzerland      (South Africa)  Total  Total 
                                        2020      2020         2020                2020   2020   2019 
                                        GBPm      GBPm         GBPm                GBPm   GBPm   GBPm 
----------------------------  --------------  --------  -----------  ------------------  -----  ----- 
Goodwill                                  26        12            8                   1     47     26 
Other intangible 
 assets                                    1         -            -                   -      1      1 
Property, plant and 
 equipment                                10         1            3                   -     14      2 
Deferred income tax 
 asset                                     3         2            -                   -      5      7 
Customer acquisition 
 costs                                     4         2            1                   -      7      - 
Current income tax 
 asset                                     1         -            -                   -      1      - 
Inventory                                  -         -            -                   -      -      1 
Trade and other receivables               10         4            2                   -     16     22 
Cash and cash equivalents                  8         2            7                   -     17      4 
----------------------------  --------------  --------  -----------  ------------------  -----  ----- 
Total assets                              63        23           21                   1    108     63 
----------------------------  --------------  --------  -----------  ------------------  -----  ----- 
 
Trade and other payables                 (8)       (4)          (4)                   -   (16)   (12) 
Borrowings                               (7)       (1)          (1)                   -    (9)    (3) 
Current income tax 
 liabilities                               -         -          (1)                   -    (1)    (1) 
Post-employment benefits                   -         -          (4)                   -    (4)      - 
Provisions                               (1)       (1)            -                   -    (2)    (6) 
Deferred income                         (25)       (9)          (7)                   -   (41)   (11) 
----------------------------  --------------  --------  -----------  ------------------  -----  ----- 
Total liabilities                       (41)      (15)         (17)                   -   (73)   (33) 
----------------------------  --------------  --------  -----------  ------------------  -----  ----- 
 
Net assets                                22         8            4                   1     35     30 
----------------------------  --------------  --------  -----------  ------------------  -----  ----- 
 

Specific to the disposal groups held for sale at 30 September 2020, the aggregate income included in other comprehensive income relating to cumulative foreign exchange differences amounted to GBP38m. Upon disposal, the income will be recycled to the income statement.

12 IFRS 16

The Group recognised the following adjustments to amounts reported in the balance sheet at 1 October 2019.

 
                                        IFRS 16 
                                   right-of-use       Derecognise 
                                         assets       IAS 17 rent 
                                      and lease          accruals        Right-of-use                  Total 
                                    liabilities   and prepayments   asset impairment*  Tax impact**   Impact 
                                           GBPm              GBPm                GBPm          GBPm     GBPm 
============================      =============  ================  ==================  ============  ======= 
Non-current Assets 
Property, plant and 
 equipment                                  118                 -                 (5)             -      113 
Deferred income tax 
 assets                                       -                 -                   -             2        2 
Current assets 
Trade and other receivables                   -               (2)                   -             -      (2) 
Assets classified 
 as held for sale                             1                 -                   -             -        1 
================================  =============  ================  ==================  ============  ======= 
 
Current Liabilities 
Borrowing                                  (30)                 -                   -             -     (30) 
Trade and other payables                      -                10                   -             -       10 
Provisions                                    -                 -                   1             -        1 
Liabilities classified 
 as held for sale                           (1)                 -                   -             -      (1) 
================================  =============  ================  ==================  ============  ======= 
 
Non-current Liabilities 
Borrowing                                 (105)                 -                   -             -    (105) 
Provisions                                    -                 -                   4             -        4 
================================  =============  ================  ==================  ============  ======= 
Net assets                                 (17)                 8                   -             2      (7) 
================================  =============  ================  ==================  ============  ======= 
 
Total equity                               (17)                 8                   -             2      (7) 
================================  =============  ================  ==================  ============  ======= 
 
 

* As a practical expedient on transition, 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. As a result, onerous provisions relating to lease payments were reclassified to the right-of-use asset.

** Tax impact represents deferred tax on the net transition adjustment.

The standard does not impact net cash flow, but cash flows from the principal portion of lease payments for property and vehicle leases are now presented within cash flows from financing activities as the payments represent the repayment of lease liabilities. The interest element of these lease payments is included in interest paid within cash flows from operating activities. Previously lease payments were reclassified as cash flows from operating activities.

The table below reconciles the operating lease obligations reported under the previous accounting standard, IAS 17 "Leases", at 30 September 2019 to the lease liability recorded under IFRS 16 at the date of transition.

 
 
 
                                                GBPm 
========================================      ====== 
Operating lease commitments reported 
 at 30 September 2019                            162 
Commitment on a lease not commenced 
 at 1 October 2019*                              (7) 
IAS 17 operating leases not qualifying 
 as leases under IFRS 16**                       (1) 
Effect of discounting of future cash 
 flows under IFRS 16***                         (18) 
Lease liability recognised at 1 October 
 2019                                            136 
============================================  ====== 
Of which: 
 - Current lease liabilities                      30 
- Non-current lease liabilities                  105 
- Liabilities classified as held for 
 sale                                              1 
--------------------------------------------  ------ 
 

* At 30 September 2019, the Group had signed an agreement to lease a property but had not yet been granted access to it. Therefore, at that date the lease qualified for disclosure as a commitment under IAS 17, but not for recognition as a liability under IFRS 16.

** A small number of property arrangements treated as leases under IAS 17 did not meet the IFRS 16 definition of a lease. In most cases this was because the landlord has substantive substitution rights.

*** Lease commitments disclosed under IAS 17 are not discounted to their present value. Under IFRS 16, lease liabilities have been discounted using the incremental borrowing rate for each lease.

The weighted average incremental borrowing rate applied to discount the lease liabilities to their present value at 1 October 2019 was 3.7%. Rates applied to individual leases ranged from 0.25% to 11.6%. Differences in discount rates reflect principally the geographic location of leases and the length of the remaining lease term.

The estimated impact of the application of IFRS 16, as opposed to IAS17, on the Group's income statement for the year ended 30 September 2020 was to increase operating profit by approximately GBP3m (due to lease costs now recognised as depreciation) while decreasing the profit for the year by approximately GBP1m due to GBP4m increase in finance costs from the lease liabilities in the year.

13 Related party transactions

The Group's related parties are its subsidiary undertakings and its key management personnel, which comprises the Group's Executive Committee and non-executive directors. Transactions and outstanding balances between the parent and its subsidiaries within the Group and between those subsidiaries and have been eliminated on consolidation and are not disclosed in this note.

 
 
                                             2020   2019 
Key management compensation                  GBPm   GBPm 
==========================================  =====  ===== 
Salaries and short-term employee benefits       8      9 
==========================================  =====  ===== 
Share-based payments                            4      7 
==========================================  =====  ===== 
                                               12     16 
==========================================  =====  ===== 
 

The key management figures given above include the executive directors of the Group.

Managing Risk

Through our 'always-on, on-demand' risk reporting, Sage is able to effectively manage our strategic, operational, commercial, compliance, change and emerging risks. This helps us to deliver our strategic objectives and goals through risk informed decisions. The Board's role is to maintain oversight of the key principal and business risks, together with ensuring that the appropriate committees are managing the risks effectively. Additionally, the Board reviews the effectiveness of our risk management approach and challenges our leaders to articulate their risk management strategies.

Sage continually assesses its principal risks to ensure continued and enhanced alignment to our strategy and consideration of where Sage is currently on its journey to becoming a great SaaS business. In FY20 we monitored and reported against 11 principal risks. Since January 2020, the COVID-19 pandemic has brought and will continue to bring significant change to the global economic, social, political and business landscape. In response, we have continually reviewed the actual, emerging and potential impacts of the pandemic on our principal risks to identify any new risks or changes to existing risks and opportunities that may have arisen, with a specific lens on what could change the risk profile materially. Whilst the pandemic has not created any additional principal risks, we have amended, as appropriate, some of our mitigating actions, as set out in the table below.

This has ensured that the business can provide the appropriate response to impacts being felt in the short term, to both the business, our colleagues and customers, and to position ourselves regarding long term sustainability and viability.

As above, the principal risks continue to evolve, reflecting the organisation's strategic focus on becoming a cloud-led SaaS business. By monitoring risk and performance indicators related to this strategy, principal risk owners focus on those metrics that signal current performance, as well as any emerging risks and issues. The principal risks reflect our three strategic lenses of customer success, colleague success and innovation. The management and mitigation actions described below reflect the refreshed principal risks and build on those actions previously reported in our FY19 Annual Report.

 
 Principal risk   Risk context                              Management and mitigation 
===============  =================================  ================================================================== 
 Understanding    Improving risk environment 
 Customer Needs 
 If we fail to 
 anticipate, 
 understand 
 and deliver 
 against 
 the 
 capabilities 
 and 
 experiences 
 our current 
 and 
 future 
 customers 
 need in a 
 timely 
 manner, they 
 will find 
 alternative 
 solution 
 providers. 
 
 Strategic 
 alignment: 
 
 Customer 
 Success 
                 ===================================================================================================== 
                  Sage is the leader 
                   in key global markets,                   *    Brand health surveys are used to provide us with an 
                   and this assists us                           understanding of customer perception of the Sage 
                   in gathering valuable                         brand and its products, which we use to inform and 
                   insights into what                            enhance our market offerings 
                   our current and future 
                   customers want and 
                   need. It also helps                      *    Detailed customer segment analysis is used to develop 
                   us to better understand                       segment-specific playbooks that support 
                   the strengths, weaknesses                     customer-focused development 
                   and appetite of our 
                   products and services, 
                   and better develop                       *    A Market and Competitive Intelligence team provides 
                   and position those                            insights that Sage uses to win in the market 
                   products and services 
                   to meet the needs of 
                   our current and future                   *    Utilisation of customer usage data and churn data, to 
                   customers.                                    understand their appetite for products, and features 
                   By understanding the 
                   specific needs of these 
                   customer groups in                       *    The interlock between our Customer Success teams, 
                   each country and region,                      marketing teams, and product teams to ensure that the 
                   we will be better positioned                  right solutions and products are provided to our 
                   to efficiently manage                         customers 
                   our products, marketing 
                   efforts and support 
                   services. This in turn                   *    Master repository of customer MI by region and by 
                   will allow us to maximise                     product which supports the identification of trends 
                   our return on investment                      such as time in product, seasonal trends and usage 
                   and retain a loyal 
                   customer and partner 
                   base over the long                       *    Ongoing refinement and improvement of market data 
                   term.                                         through feedback from the business, partners and 
                                                                 customers, including specific focus upon COVID-19 and 
                                                                 the impact on SMBs 
 
 
                                                            *    Customer Advisory Boards, Customer Design Sessions 
                                                                 and NPS detractor call-back channels are used to 
                                                                 constantly gather information on customer needs 
 
 
                                                           In progress: 
                                                            *    By providing ISVs with access to the Sage Developer 
                                                                 Platform, which is focused on the development of 
                                                                 bespoke solutions, we gain additional insights into 
                                                                 customer needs 
 
 
                                                            *    The Centre of Excellence is being created to support 
                                                                 our Indirect Sales and Third-Party Partner approach 
                 =================================  ================================================================== 
 Execution of     Improving risk environment 
 Product 
 Strategy 
 If we fail to 
 deliver the 
 capabilities 
 and 
 experiences 
 outlined in 
 our 
 product 
 strategy 
 in a timely 
 manner, 
 we will not 
 meet 
 the needs of 
 our customers 
 or our 
 commercial 
 goals. 
 
 Strategic 
 alignment: 
 
 Customer 
 Success 
 Innovation 
                 ===================================================================================================== 
                  A key component of 
                   Sage's transition to                     *    Following a product rationalisation and 
                   a Software as a Service                       prioritisation exercise Sage's product strategy was 
                   (SaaS) company is the                         updated to ensure that native cloud products are 
                   delivery of cloud-native                      delivered in line with customer expectations 
                   products and solutions. 
                   To achieve this, we 
                   need to execute, in                      *    A licencing model transition strategy is in place, 
                   a sound and methodical                        anchored on the Sage Business Cloud 
                   manner at pace, a prioritised 
                   product strategy that 
                   moves our product portfolio              *    Sage Business Cloud is available in the United 
                   to cloud-native solutions.                    Kingdom and Ireland, North America, France and Spain 
                   This may include a 
                   transitional period 
                   of cloud-connected                       *    Recent cloud-native products (Sage Intacct and Sage 
                   products, with a clear                        People) are available in Sage Business Cloud in North 
                   path to the cloud-native                      America, with international delivery continuing to be 
                   products for our current                      rolled out 
                   and future customers' 
                   requirements. 
                                                            *    A Product Marketing team oversees competitive 
                                                                 positioning and product development to align products 
                                                                 with the needs of our customers 
 
 
                                                            *    Prioritisation of core product and service delivery 
                                                                 in key territories, including responding to the 
                                                                 impact of COVID-19 
 
 
 
                                                           In progress: 
                                                            *    An assessment of the key dependencies within the 
                                                                 segment and regional plans, to ensure that plans meet 
                                                                 the minimal viability thresholds 
 
 
                                                            *    The continued enhancement of the Governance, 
                                                                 reporting and planning framework, to ensure that 
                                                                 strategic bets and plans align, are executable, and 
                                                                 for on-demand strategy performance reporting 
 
 
                                                            *    A review of the Partner Model framework across small 
                                                                 and medium segments to ensure strategic objectives 
                                                                 are being met 
                 =================================  ================================================================== 
 Innovation       Stable risk environment 
 If we fail to 
 identify and 
 leverage 
 disruptive 
 technologies 
 and invest in 
 modern 
 development 
 practices and 
 tools in a 
 timely 
 manner, we 
 will 
 not meet the 
 needs of our 
 customers or 
 our commercial 
 goals. 
 
 Strategic 
 alignment: 
 
 Customer 
 Success 
 Innovation 
                 ===================================================================================================== 
                  As Sage transitions 
                   into a SaaS business                    *    Creation and growth of Sage AI Labs to focus and 
                   powered by a subscription                    drive AI/ML development including to enhance the 
                   licence model, we must                       capability of our products, starting with Sage 
                   be able to rapidly                           Intacct 
                   deploy new innovations 
                   to our customers and 
                   partners. This innovation               *    Focused colleague engagement to accelerate innovation 
                   could relate to new                          across the organisation through Continuous Innovation 
                   technologies, services,                      Community 
                   or new ways of working. 
                   Innovation requires 
                   us to address how we                    *    Enhanced, consistent digital experience for all Sage 
                   encourage innovation                         Business Cloud users through the Sage Design System 
                   across our people, 
                   processes and technology, 
                   and how we make this                    *    Acquisition of AutoEntry provides automation of data 
                   innovation sustainable.                      entry through AI and Optical Character Recognition 
                   By building innovation                       Technology for our accounting products 
                   into our collective 
                   DNA, we can empower 
                   our colleagues to improve               *    Objectives integrated into the planning of each 
                   the customer experience,                     segment and region to drive AI Transformation, Sage 
                   and drive efficiencies                       Business Cloud adoption and innovation of product 
                   in how we deliver our                        features based on identified needs of customers 
                   products and services. 
                   By strategically investing 
                   in platforms and relationships,         *    Integration of the Pegg chat-bot with Sage Accounting, 
                   we can also harness                          to enhance the product experience using artificial 
                   the innovation of our                        intelligence 
                   partners. By providing 
                   opportunities for our 
                   partners to interact 
                   with our products we                   In progress: 
                   can drive scalable                      *    Simple, smart and open technology strategy to provide 
                   growth and improve                           API and microservices through a Sage Developer 
                   the customer experience.                     Platform 
 
 
                                                           *    Strategic acquisition and collaboration with partners 
                                                                to complement and enable accelerated innovation 
 
 
                                                           *    Platform Services delivered to Sage Business Cloud to 
                                                                enhance value proposition for cloud adoption 
 
 
                                                           *    Leveraging Sage ID and the Sage Business Cloud 
                                                                network to deliver a unified and highly personalised 
                                                                experience for each customer across the entirety of 
                                                                Sage Business Cloud 
 
 
                                                           *    Development of an incubation framework to guide how 
                                                                Sage interacts with its innovation partners 
 
 
                                                           *    Enhancement of the Pegg AI capability, and increased 
                                                                use of machine learning to support new areas and 
                                                                operations 
 
 
                                                           *    Continuing development of Sage's service fabric to 
                                                                support the development of cloud solutions 
                 =================================  ================================================================== 
 Route to         Improving risk environment 
 Market 
 If we fail to 
 deliver a 
 bespoke 
 blend of route 
 to market 
 channels 
 in each 
 country, 
 based upon 
 common 
 components, we 
 will not be 
 able 
 to efficiently 
 deliver the 
 right 
 capabilities 
 and 
 experiences 
 to our current 
 and future 
 customers. 
 
 Strategic 
 alignment: 
 
 Customer 
 Success 
                 ===================================================================================================== 
                  By offering our current 
                   and potential customers                 *    Market data and intelligence is disseminated 
                   the right information                        internally to support decision makers in the best 
                   on the right products                        routes to market 
                   and services at the 
                   right time, we can 
                   maximise the value                      *    Dedicated colleagues are in place to support partners, 
                   we can obtain from                           and to help manage the growth of targeted channels 
                   our marketing and customer 
                   engagement activities. 
                   This can shorten our                    *    The Sage Partner Programme has been moved into the 
                   sales cycle and ensure                       marketing organisation to drive increased alignment 
                   that customer retention                      of the indirect channel to market 
                   is improved. It can 
                   also use new products 
                   and services, such                      *    New routes to market are being opened through our 
                   as payments and banking                      partnerships with payment and banking technology 
                   technologies, to draw                        providers 
                   new customers into 
                   the Sage family. 
 
                                                          In progress: 
                                                           *    Internationalisation of existing cloud-native 
                                                                products (Sage Intacct, Sage People) through a 
                                                                partner-driven sales model 
 
 
                                                           *    A Centre of Excellence is being created to support 
                                                                our Indirect Sales and Third-Party Partner approach 
                 =================================  ================================================================== 
 Customer         Stable risk environment 
 Success 
 If we fail to 
 effectively 
 identify 
 and deliver 
 ongoing 
 value to our 
 customers by 
 focusing on 
 their 
 needs over the 
 lifetime of 
 their 
 customer 
 journey, 
 we will not be 
 able to 
 achieve 
 sustainable 
 growth 
 through 
 renewal. 
 
 Strategic 
 alignment: 
 
 Customer 
 Success 
 Colleague 
 Success 
                 ===================================================================================================== 
                  In becoming a true 
                   SaaS business, we must                   *    A Product Delivery team develops and delivers those 
                   maintain a sharp focus                        products needed by our customers to support their 
                   on the relationship                           success 
                   we have with our customers, 
                   constantly focusing 
                   on delivering the products,              *    Battlecards are in place for key products in all 
                   services and experiences                      countries, setting out the strengths and weaknesses 
                   our customers need                            of competitors and their products 
                   to be successful. If 
                   we do not do this, 
                   they will likely find                    *    Defined 'customer for life' roadmaps are in place, 
                   another provider who                          detailing how products fit together, any 
                   does give them these                          interdependencies, and migration pathways for current 
                   things. Conversely,                           and potential customers 
                   if we do these things 
                   well these customers 
                   will stay with Sage,                     *    A data-driven Customer Success Framework was designed 
                   increasing their lifetime                     and piloted in UKI and is being rolled out in phases 
                   value, becoming our                           to other major markets to enhance the customer 
                   greatest marketing                            experience and ensure that Sage is better positioned 
                   advocates.                                    to meet the current and future needs of the customer 
                   While Sage is renowned 
                   for its quality customer 
                   support, a focus on                      *    Continuous Net Promoter Score (NPS) surveying allows 
                   customer success requires                     Sage to identify customer challenges rapidly, and 
                   more proactive engagement                     respond in a timely manner to emerging trends 
                   as well. By proactively 
                   helping customers to 
                   recognise and fully                      *    Customer Journey mapping and mapping of the five core 
                   realise the value of                          customer processes to ensure appropriate strategy 
                   Sage's products we                            alignment and alignment to Target Operating Model 
                   can help increase the 
                   value of these relationships 
                   over time and reduce                     *    All customer success initiatives reassessed from a 
                   the likelihood of customer                    COVID-19 perspective 
                   loss. By aligning our 
                   people, processes and 
                   technology with this 
                   focus in mind, all                      In progress: 
                   Sage colleagues can                      *    Consolidation of CRM systems continues to provide an 
                   help support our customers                    efficient single view of the customer across all 
                   to be successful and                          markets 
                   in turn drive increased 
                   financial performance. 
                                                            *    Delivery of the Customer Core Programme 
                 =================================  ================================================================== 
 Third Party      Improving risk environment 
 Reliance 
 If we do not 
 embed our 
 partners 
 as an integral 
 and aligned 
 part 
 of Sage's 
 go-to-market 
 strategy in a 
 timely manner, 
 we will fail 
 to deliver the 
 right 
 capabilities 
 and 
 experiences 
 to our 
 customers. 
 
 Strategic 
 alignment: 
 
 Customer 
 Success 
                 ===================================================================================================== 
                  Sage places reliance 
                   on third-party providers                *    Dedicated colleagues are in place to support partners, 
                   to support the delivery                      and to help manage the growth of targeted channels 
                   of our products to 
                   our customers. Any 
                   interruption in these                   *    Standardised implementation plans for Sage products 
                   services or relationships                    that facilitate efficient partner implementation 
                   could have a profound 
                   impact on Sage's reputation 
                   in the market and could                 *    A specialised Procurement function supports the 
                   result in significant                        business with the selection of strategic third-party 
                   financial liabilities                        suppliers and negotiation of contracts 
                   and losses. 
                   Sage has an extensive 
                   network of sales partners               *    Clear roles and responsibilities for colleagues are 
                   critical to our success                      outlined in the Procurement Lifecycle Policy and 
                   in the market, and                           Procedures, which includes delegated levels of 
                   suppliers upon whom                          authority for investment approval 
                   it places reliance. 
                   Carefully selecting, 
                   managing and supporting                 *    The Sage Partner Programme has been moved into the 
                   these partners and                           marketing organisation to drive increased alignment 
                   suppliers is critical                        of the indirect channel to market 
                   to how we grow our 
                   business, as well as 
                   ensuring that we only 
                   engage with those people               In progress: 
                   and organisations that                  *    Rationalisation of targeted channels is continuing to 
                   share Sage's values                          focus on value-add activities 
                   and aspirations. 
 
                                                           *    Managed growth of the API estate, including enhanced 
                                                                product development that enables access by 
                                                                third-party API developers 
 
 
                                                           *    Enhancement of our third-party management framework, 
                                                                to support closer alignment and oversight of 
                                                                third-party activities 
 
 
                                                           *    A Centre of Excellence is being created for our 
                                                                Indirect Sales and Third-Party Partner approach 
                 =================================  ================================================================== 
 People and       Improving risk environment 
 Performance 
 If we fail to 
 ensure we have 
 engaged 
 colleagues 
 with the 
 critical 
 skills, 
 capabilities 
 and capacity 
 we need to 
 deliver 
 on our 
 strategy, 
 we will not be 
 successful. 
 
 Strategic 
 alignment: 
 
 Customer 
 Success 
 Colleague 
 Success 
                 ----------------------------------------------------------------------------------------------------- 
                  As Sage transitions 
                   into a SaaS business,               *    Continued embedding of our operating model to ensure 
                   the capacity, knowledge                  'decision making is made as close to the customer as 
                   and leadership skills                    possible with the appropriate governance and 
                   we need will change.                     strategic direction in place 
                   Sage will not only 
                   need to attract the 
                   talent and experience               *    Extensive focus on our hiring channels ensuring we 
                   we will need to help                     are attractive in the market through our enhanced 
                   navigate this change,                    employee value proposition, enhanced presence through 
                   we will also need to                     social media such as Glassdoor, Comparably, Twitter, 
                   provide an environment                   LinkedIn, and Facebook 
                   where colleagues can 
                   develop to meet these 
                   new expectations, an                *    Identifying new hiring channels, for example our 
                   environment where everyone               pathways programme which enables talented returners 
                   can perform at their                     who are struggling to find a route back into work 
                   very best. 
                   By empowering colleagues 
                   and leaders to make                 *    Focusing on entry level hiring through apprentice and 
                   decisions, be innovative,                graduate programmes 
                   and be bold in delivering 
                   on our commitments, 
                   Sage will be able to                *    Ensuring our reward mechanisms incentivise and drive 
                   create an attractive                     the right behaviour with a focus on ensuring fair and 
                   working environment.                     equitable pay in all markets 
                   By addressing drivers 
                   of colleague voluntary 
                   attrition, and embracing            *    Using a range of mechanisms - including digital 
                   the values of successful                 platforms to recognise great performance and 
                   SaaS businesses, Sage                    outstanding achievements 
                   can increase colleague 
                   engagement and create 
                   an aligned high performing          *    Focusing on the development of our leaders to ensure 
                   team.                                    they create the environment which enables colleagues 
                                                            to thrive and perform at their very best 
 
 
                                                       *    Through our Sage Belong programme ensuring we are 
                                                            supporting all colleagues to be successful at Sage 
                                                            regardless of age, gender, sexual orientation, ethnic 
                                                            origin or social background 
 
 
                                                       *    Encouraging collaboration across the organisation 
                                                            through internal media channels, hackathon, 
                                                            collaboration jams and Sage Foundation 
 
 
                                                       *    Placing colleagues (and customers) at the heart of 
                                                            our response to the COVID-19 pandemic, including the 
                                                            availability of 'Headspace', our 'Always Listening' 
                                                            portal and 'Your Voice' Hub 
 
 
 
                                                      In progress: 
                                                       *    Sage-wide reward and capability review ensuring we 
                                                            have in place the SaaS skills and reward mechanisms 
                                                            we need 
 
 
                                                       *    Design for emerging talent programme (including VP 
                                                            development programmes) 
                 ---------------------------------  ------------------------------------------------------------------ 
 Culture          Improving risk environment 
 If we do not 
 fully empower 
 our colleagues 
 and enable 
 them 
 to take 
 accountability 
 in line with 
 our shared 
 Values 
 and 
 Behaviours, 
 we will be 
 challenged 
 to create a 
 SaaS 
 culture, that 
 meets Sage's 
 business 
 ambitions. 
 
 Strategic 
 alignment: 
 
 Customer 
 Success 
 Colleague 
 Success 
                 ===================================================================================================== 
                  The development of 
                   a shared behavioural                     *    Integration of Values and Behaviours into all our 
                   competency that encourages                    core colleague priorities including, performance 
                   colleagues to always                          management, talent attraction, selection and 
                   do the right thing,                           development, leadership development and onboarding 
                   put customers at the 
                   heart of business, 
                   and drive innovation                     *    Code of Conduct communicated to all colleagues, and 
                   will be critical in                           subject to annual certification 
                   Sage's successful transition 
                   to a SaaS business. 
                   Devolution of decision                   *    Alignment of personal objectives across Sage, with 
                   making, and the acceptance                    direct cascade from the CEO 
                   of accountability for 
                   these decisions, will 
                   need to go hand in                       *    Formal assessment against personal objectives for 
                   hand as the organisation                      each colleague as part of established performance 
                   develops and sustains                         management process, which also considers personal 
                   its shared Values and                         application of Sage's Values and Behaviours 
                   Behaviours, and develops 
                   a true SaaS culture. 
                   Sage will also need                      *    Core eLearning modules rolled out across Sage, with 
                   to create a culture                           annual refresher training 
                   of empowered leaders 
                   that support the development 
                   of ideas, and that                       *    Whistleblowing and Incident Reporting mechanisms in 
                   provides colleagues                           place to allow issues to be formally reported and 
                   with a safe environment                       investigated 
                   that allows for honest 
                   disclosures and discussions. 
                   Such a trusting and                      *    All colleagues are actively encouraged to take up to 
                   empowered environment                         five paid Sage Foundation days each year, to support 
                   can help sustain innovation,                  charities and provide philanthropic support to the 
                   enhance customer success                      community. Support for Sage Foundation included in 
                   and drive the engagement                      bonus goals for our most senior leaders 
                   that results in increased 
                   market share. 
                                                            *    Placing colleagues (and customers) at the heart of 
                                                                 our response to the COVID-19 pandemic, including the 
                                                                 availability of 'Headspace', our 'Always Listening' 
                                                                 portal and 'Your Voice' Hub 
 
 
                                                            *    Sage Compliance has been transformed into Sage 
                                                                 Business Integrity, with a mandate to guide, support 
                                                                 and challenge the business to own and enhance its 
                                                                 Values and Behaviours 
 
 
                                                            *    In-person anti-bribery and corruption training has 
                                                                 been delivered to multiple regions, with the 
                                                                 remaining regions to be completed based on assessed 
                                                                 risk 
 
 
                                                           In progress: 
                                                            *    Creation of a culture framework and specific metrics 
                                                                 to drive Sage's Values and Behaviours into the core 
                                                                 of the business 
 
 
                                                            *    Sales Capability Framework has been built with Values 
                                                                 and Behaviours embedded to act as a pilot for our 
                                                                 global Capability Framework approach 
                 =================================  ================================================================== 
 Cyber Security   Improving risk environment 
 and Data 
 Privacy 
 If we fail to 
 responsibly 
 collect, 
 process and 
 store 
 data, together 
 with ensuring 
 an appropriate 
 standard of 
 cyber 
 security 
 across 
 the business, 
 we will not 
 meet 
 our regulatory 
 obligations, 
 and will lose 
 the trust of 
 our 
 stakeholders. 
 
 Strategic 
 alignment: 
 
 Customer 
 Success 
 Innovation 
                 ===================================================================================================== 
                  Information is the 
                   life blood of a SaaS                *    Accountability is established within both IT and 
                   business - protecting                    Product for all internal and external data being 
                   the confidentiality,                     processed by Sage. The Chief Information Security 
                   integrity and accessibility              Officer oversees information security, with a network 
                   of this data is table                    of Information Security Officers that directly 
                   stakes for a data-driven                 support the business 
                   business, and failure 
                   to do so can have significant 
                   financial and regulatory            *    The Chief Data Protection Officer supported by a Data 
                   consequences in the                      Governance forum oversees information protection and 
                   General Data Protection                  development for Sage 
                   Regulation (GDPR) era. 
                   In addition, we also 
                   need to use our data                *    A network of country-level data champions supports 
                   efficiently and effectively              the business in embedding Sage practices across the 
                   to drive improved business               organisation, with a particular focus on the 
                   performance.                             requirements of the GDPR 
 
 
                                                       *    Formal certification schemes are maintained, across 
                                                            appropriate parts of the business, and include 
                                                            internal and external validation of compliance 
 
 
                                                       *    An incident management framework is in place, which 
                                                            includes rating of incidents and requirements for 
                                                            notification and escalation, and online incident 
                                                            reporting to Sage Risk 
 
 
                                                       *    All colleagues are required to undertake awareness 
                                                            training for information management and data 
                                                            protection, with a focus on the GDPR requirements. 
                                                            Colleagues who frequently handle personal data also 
                                                            undertake role-based training 
 
 
                                                       *    The Information Security Risk Management Methodology 
                                                            continues to be deployed to provide objective risk 
                                                            information on our assets and systems 
 
 
                                                       *    Ongoing assessment of the impact of working from home, 
                                                            and any potential additional risks and required 
                                                            enhancement in controls. 
 
 
                                                      In progress: 
                                                       *    Data governance forum is leading a review of how Sage 
                                                            can provide maximum value to its current and future 
                                                            customers, including the use of enhanced AI/ML 
                                                            capabilities 
 
 
                                                       *    A dedicated insider threat workstream to continually 
                                                            develop and assess insider risk in Sage and update 
                                                            response plans 
                 =================================  ================================================================== 
 Data Strategy    Stable risk environment 
 If we fail to 
 identify, 
 maximise 
 and utilise 
 the 
 value of our 
 data and 
 customer 
 data in a 
 timely 
 manner in 
 accordance 
 with our data 
 principles, we 
 will not be 
 able 
 to realise the 
 full potential 
 of our assets. 
 
 Strategic 
 alignment: 
 
 Customer 
 Success 
 Innovation 
                 ===================================================================================================== 
                  Information is the 
                   life blood of a SaaS                     *    IT and Product have been consolidated under a single 
                   business - it tells                           leader to drive alignment of data management practice 
                   us how we create revenue,                     across the business 
                   how we can improve 
                   the customer experience, 
                   and how we can meet                      *    Formation of a data strategy around seven initiatives 
                   our obligations and                           to support the delivery of real customer value and 
                   commitments. Analysed                         solve real customer problems 
                   using manual and machine 
                   learning, it provides 
                   us with the intelligence                 *    Data principles have been created 
                   we need to run and 
                   build our business. 
                                                            *    New customer consent service initiated to support 
                                                                 product telemetry 
 
 
 
                                                           In progress: 
                                                            *    Establishment of a global data stack. 
 
 
                                                            *    Data governance forum sponsoring a review of how Sage 
                                                                 can provide maximum value to its current and future 
                                                                 customers, including the use of enhanced Artificial 
                                                                 Intelligence /Machine Learning capabilities 
                 =================================  ================================================================== 
 Live Services    Stable risk environment 
 Management 
 If we fail to 
 maintain a 
 reliable, 
 scalable and 
 secure live 
 services 
 environments, 
 we will be 
 unable 
 to deliver the 
 consistent 
 cloud 
 experience 
 expected 
 by our 
 customers. 
 
 Strategic 
 alignment: 
 
 Customer 
 Success 
 Innovation 
                 ===================================================================================================== 
                  As Sage continues to 
                   transition into a great             *    Formal onboarding process established and executed 
                   SaaS business, there                     including ongoing management in Portfolio Management 
                   is a greater focus                       processes 
                   on ensuring that we 
                   are able to continue 
                   to scale our services               *    Incident and management change processes adhered to 
                   environment in a robust,                 for all products and services. 
                   agile, and speedy manner 
                   to ensure the delivery 
                   of a consistent and                 *    Report hosting and tool costs per product 
                   robust cloud experience. 
                   This delivery could 
                   relate to new technologies,         *    Published established tool standards 
                   operating practices, 
                   and services. 
                                                       *    Attained service level objectives including uptime, 
                   Live Services Management                 responsiveness, and mean time to repair objectives 
                   must provide the right 
                   Infrastructure and 
                   Operations for all                  *    An established forum for continuous assessment and 
                   of our customer products,                refinement 
                   a platform to host 
                   customer products, 
                   the governance to insure            *    Real Time Demand Management processes and controls 
                   they are adhering to 
                   best practices, and 
                   the oversight that                  *    Disaster Recovery Capability and operational 
                   ensures optimal service                  resilience models 
                   availability, performance, 
                   security protection 
                   and restoration (if                In progress: 
                   required).                          *    Continued enhancement and development of our robust 
                                                            security programmes 
 
 
                                                       *    Continue to reinforce accountability and ownership 
                                                            across Product Owners, underpinned by ongoing risk 
                                                            assessments at segment and category levels 
 
 
                                                       *    Future state live services environment Transformation 
                                                            Plan developed and being deployed 
                 =================================  ================================================================== 
 

Statement of Directors' Responsibilities

Responsibility statement of the Directors on the Annual Report & Accounts

The Annual Report & Accounts for the year ended 30 September 2020 includes the following responsibility statement.

The Directors as at the date of this report, whose names and functions are listed in the Board of Directors section of the Annual Report and Accounts, confirm that:

 
 --   To the best of their knowledge, the Group's financial statements, 
       which have been prepared in accordance with IFRS as adopted 
       by the EU, give a true and fair view of the assets, liabilities, 
       financial position and profit of the Group; 
 --   To the best of their knowledge, the Directors' report and the 
       Strategic report include a fair review of the development and 
       performance of the business and the position of the Group, together 
       with a description of the principal risks and uncertainties 
       that it faces. 
 

The contents of this announcement, including the responsibility statement above, have been extracted from the annual report and accounts for the year ended 30 September 2020 which may be found at www.sage.com/investors/investor-downloads and will be published on 2 December 2020. Accordingly, this responsibility statement makes reference to the financial statements of the Company and the group and to the relevant narrative appearing in that annual report and accounts rather than the contents of this announcement.

On behalf of the Board

J Howell

Chief Financial Officer

19 November 2020

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