Group strategy and performance

Overview of Group results

This has been a challenging year with volatile market conditions in two of our key geographic regions. After a good performance in the first half of the year, the Group saw softening customer demand in the UK and North America, although Mainland Europe and Rest of World continued to perform strongly. This resulted in organic revenue growth excluding Sage Healthcare Division for the Group of 6%* (3%* organic revenue growth overall).

Subscription revenues, representing the 61% of our revenues which are recurring in nature, grew by 10%* and were less affected by market conditions in the UK and North America. The continued growth in subscription revenues compensated for the more challenging market conditions we experienced in software and software related services. Combined software/support contracts, the largest component of subscription revenues, represented 39% of our total revenues and grew by 14%* over the year. This demonstrates the resilience of our business model, with our customers continuing to use our products and services to increase their operational efficiency in difficult markets. Software and software-related services revenues grew by 2%*, reflecting the market slowdown in North America and the UK, beginning in the second half of the year.

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Product and service strategy

Innovation is at the heart of our strategy. We continue to adapt and evolve our products and services offering to meet the changing needs of our 5.8 million customers, with an increasing range of customer support contracts, as well as tiered subscription offerings tailored to the varying requirements of our customer base. Our integrated product suites, launched last year, have been well received by our customers and business partners and are beginning to contribute to organic growth. Software as a Service ("SaaS") and hosted products such as Sage 50 Accounts Professional Online, SageCRM.com, Sage Accpac ERP and Billing Boss continue to show strong demand, although they remain a modest contributor to Group revenues overall.

Over the year we successfully extended our support offerings with Sage Accountants' Club Priority Link in the UK, Contrat Platine for Ciel! customers in France and the Premier and Avanzado support contracts in Spain. Customer support continues to drive growth in Spain, South Africa, Poland and Portugal, while our newer markets in China, India, Malaysia and Singapore successfully leveraged their existing solutions, adapting best practice solutions from our more established regions. The growth in customer demand for quality support confirms that customers want to improve their business performance through the innovative and well-designed products and services that Sage offers.

We are also seeing a growing trend for larger companies in the SME sector to extend their businesses beyond their home territories. Our mid-market customers increasingly need solutions that are robust enough to cope with multiple government legislation, multiple currencies and multiple languages, yet can offer rapid integration and local customisation. Our international products such as CRM (ACT!, SalesLogix, SageCRM), Sage ERP X3 and Sage Accpac ERP broaden our portfolio of localised solutions and are growing well in our emerging markets, helping us expand into new territories. We anticipate that the trends in the SME sector will increasingly facilitate the development of new products and services aimed at the emerging international SME sector that will complement our current portfolio of locally focused solutions. With our long experience with SMEs, we understand these emerging challenges and are developing solutions that meet the international demands of medium-sized companies, yet still offer the flexibility and localisation that is our competitive advantage.

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Acquisition strategy

Relative to previous years, this has been a quiet year for acquisitions. We continue to evaluate a number of opportunities in both new and existing markets, although in many cases vendor price expectations have not as yet adjusted to current market conditions. During the year, we completed three principal acquisitions, for an enterprise value of £51.2m. KCS, a leading supplier of HR and payroll services in the UK, was completed in October 2007 for an enterprise value of £20.2m. Tekton, a supplier of construction solutions for UK mid-market companies, was completed in March 2008 for an enterprise value of £19.8m. Eurowin, acquired in July 2008 for an enterprise value of £11.2m, strengthened our market position at the entry-level in Spain. These acquisitions were all strategic investments in broadening our product offering.

We remain committed to our acquisition strategy of expanding our product and service offering to SMEs in both new and existing territories. As we expand the scope of our businesses worldwide, we are increasingly focused on leveraging our scale and exploiting global synergies between our businesses. Our strong balance sheet and cash conversion put us in an advantageous position to pursue opportunities when asset prices fall. However, our acquisition methodology remains robust and highly disciplined in determining valuation parameters.

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Distribution strength

Our distribution strength remains one of our key competitive advantages, with over 30,000 business partners and 40,000 accountancy practices recommending and marketing Sage products worldwide. The role of our business partners in promoting our products and services and providing local expertise continues to evolve as customers demand increasing levels of tailored products and specialised services. Our business partners are a key component in building and maintaining on-going relationships with our customers.

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Customer base

Over the year, we added 341,000 new customers (37,000 resulting from acquisitions made this year). New customers are an important component in our long-term growth strategy as customers tend to remain loyal to their original software supplier as they grow, purchasing upgrades and additional products and driving future organic revenue growth.

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North America management team

This has been a transitional year for our North American business and a period of organisational change. In March 2008, we appointed Sue Swenson as President and CEO to lead our North American business. She was joined in June 2008 by Marc Loupé as Chief Financial Officer of North America. Lindy Benton, who brings extensive experience in healthcare industry management, joined in September 2008 as Chief Operating Officer of Sage Healthcare Division. Greg Hammermaster joined in November 2008, after the end of the financial year, as President of Sage Payment Solutions Division. Greg has long-term experience of the payments industry. The new executive management team is focusing on driving operational improvements and earnings growth.

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Environment

We are aware of the current debate around climate change, and our corporate policy is to minimise our carbon footprint where possible. This year, our focus has been on developing a globally consistent template for measuring our carbon emissions and waste generation across our businesses in all our major locations as an initial step in our strategy to reduce our long-term impact on the global environment. We encourage our employees to think and act in an environmentally positive manner to help us realise this strategy.

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Outlook

The strength and flexibility of our business model has helped us achieve solid results in difficult market conditions. As markets weakened in the UK and North America, we were rapidly able to adapt to the changing markets and proactively refocus our businesses in these regions. Our businesses in Mainland Europe and Rest of World recorded strong results through a combination of favourable market conditions and good commercial execution.

We anticipate that the broader economic climate will remain uncertain for the near future. However, our business model, together with consistently strong cash flows, robust balance sheet and high level of recurring revenue streams, provides a solid foundation for our operations. Our large and geographically diverse customer base of over 5 million customers also provides many opportunities to meet future demand for business critical solutions designed to help SMEs run their businesses more efficiently in difficult market conditions.

Whilst we are still early in our new financial year, growth in subscription revenues has continued to offset weakness in software revenues. Although we remain cautious in our outlook, we expect demand for our customer support to continue, which combined with tight cost control and our strong geographic market positions, will allow us to weather these turbulent times.

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