THE SAGE GROUP PLC ANNUAL REPORT AND ACCOUNTS 2019 BECOMING A GREAT SAAS COMPANY FINANCIAL HIGHLIGHTS Organic recurring revenue growth Organic operating margin 10.8% 23.7% FY18: 6.7% FY18: 28.8% STRATEGIC KPIs Renewal by value Subscription penetration 101% 55% FY18: 101% FY18: 45% Annualised recurring revenue (ARR) growth Sage Business Cloud penetration 12.6% 48% FY18: N/A* FY18: 29% See more about our Strategic KPIs on pages 8 to 9 * FY19 is the first year of disclosure for ARR growth. OTHER KEY HIGHLIGHTS Underlying cash conversion Organic revenue growth 129% 5.6% FY18: 96% FY18: 6.5% Statutory revenue growth Dividend 5.0% 16.91p FY18: 7.6% FY18: 16.50p About our non-GAAP measures and why we use them Throughout the Strategic Report we quote two kinds of Organic measures allow management and investors to non-GAAP measure: underlying and organic. Underlying understand the like-for-like performance of the business. measures allow management and investors to compare Full definitions of underlying and organic can be found within performance without the potentially distorting effects note 2 of the financial statements. Reconciliations of statutory of foreign exchange movements, one-off items or revenue, operating profit and basic earnings per share to their non-operational items. underlying and organic equivalents are in the Financial review starting on page 46. On the cover: Sage Intacct customer, Specialty's Café and Bakery, which operates over 50 restaurants in California, Washington and Illinois. STRATEGIC REPORT Sage is a global market leader for Contents technology that helps small and Strategic report 2-3 Purpose, vision & strategy medium businesses perform at their 4-5 Our business model 6-7 Our investment case best. Sage is trusted by millions of 8-9 Key performance indicators 10-11 Chairman’s statement customers worldwide to deliver the 12-15 CEO review best cloud technology and support, 16-17 Our Strategy 18-21 Customer Success with our partners, to manage finances, 22-25 Colleague Success 26-29 Innovation operations, and people. We believe 30 Non-financial information statement 31 Section 172 statement in doing everything we can to help 32-35 People 36-37 Customers people be the best they can be, 38-41 Foundation so the combined efforts of 13,000 42-45 Environment 46-52 Financial review Sage colleagues working with 54-57 Risk management businesses and communities 58-65 Principal risks and uncertainties Governance make a real difference to the world. 66 Chairman’s introduction to corporate governance 67-68 Board of Directors 69 Executive Committee 70-95 Corporate governance report 96-123 Directors’ remuneration report 124-128 Directors’ report Financial statements 130-139 Independent auditor’s report to the members of The Sage Group plc 140-144 Group financial statements 145-205 Notes to the Group financial statements 206-213 Company financial statements 214-216 Glossary 217 Shareholder information The Sage Group plc. Annual Report and Accounts 2019 1 OUR PURPOSE is to transform the way people think and work so their organisations can thrive. It’s the reason we exist as a business. OUR VISION is to become a great SaaS Company for Customers and Colleagues alike. We do this by serving our customers on subscription and in the cloud. 2 Annual Report and Accounts 2019 The Sage Group plc. OUR STRATEGY is how we will achieve our vision. It is designed around three strategic lenses: Customer Colleague Innovation Success Success Creating solutions that deliver real customer value and Creating enduring Creating an environment solve real customer problems subscription relationships that values the individual, by doing things differently, and having a customer- fosters collaboration and leveraging incremental, centric approach in rewards all colleagues emerging and experimental everything we do innovation THESE PRIORITIES HELP US… The Sage Group plc. Annual Report and Accounts 2019 3 Capture the MARKET OPPORTUNITY $36bn $34bn Sage operates in a total addressable +13% market (TAM) set to be worth Cloud growth $17bn $19bn $36bn in FY20 comprising 72m businesses. This market grows at 7% per year, 7% with spend on cloud growing at 13%. Total market growth Included within this TAM is the single-largest software category in the world, Accounting and Financials. +2% $17bn $17bn On-premise growth Cloud On-premise 2019 2020 Source data = IDC Customs Solutions Market Model Market growth Market growth in this TAM is well ahead of global GDP growth. Catalysts for this growth are: 1. Gaining insights and efficiencies 2. The shift to subscription and the cloud – Accounting and Financials software is no longer about – Moving to a business model where consumers pay a producing backward-looking accounts. As technology subscription fee for usage rather than owning an asset is evolves, software can continue to help businesses becoming increasingly prevalent across all industries. This, become more efficient and allow them to gain more combined with cloud technology, allows the vendor to offer insights into their business. This adds significant value more value by offering access to the latest upgrades as soon as and results in back-office software becoming more they are available. It also boosts retention rates of customers critical to a business’s long-term success. as vendors can improve their relationship with customers. – This includes data-entry automation, artificial – Furthermore, as governments and other stakeholders intelligence, machine learning, business insights automate processes (such as Making Tax Digital in the UK), and analytics. Read more about what Sage is doing there is more demand from customers to be on the latest here on pages 26 to 29. version of software to ensure they remain compliant. – Globally, cloud adoption rates are expected to continue to trend upwards from 43% in 2019 to 46% in 2020. The USA is the most cloud adoptive region and forecast to reach 55% in 2020, with the UK&I expected to be at 43% and France at 33%. See more on the economics of a subscription model on pages 6 to 7. by serving SMALL AND MEDIUM businesses Sage targets the professional user, typically an accountant or book-keeper who understands compliance and wants rich functionality to help drive efficiencies and gain more insight into their business. Small businesses Small customers are typically owner-run businesses with professionals or small teams Medium businesses responsible for finances Medium customers are more complex, and human resources. usually functionally structured around They are looking to automate specialist teams and departments accounting and compliance with different needs. They are often while managing costs and scaling and transforming and need cash flow. Their concerns insights for growth and competitive tend to be around compliance advantage. They typically spend and risk and they need longer integrating our solutions simple solutions, where they into their business. can subscribe and be up and running. Sage serves millions of small and medium customers around the world. through unique COMPETITIVE ADVANTAGES That enhance our proposition and ensure we stand out against the competition. Trust World-class Sage has a strong reputation products as a trusted advisor, renowned for keeping customers safe Sage continues to invest and compliant in technology to ensure its products remain among the market leaders Relationships Global reach: Sage prides itself on local focus building strong and lasting relationships with its Sage has global scale but extensive customers. We provide local knowledge which helps ensure market-leading customer its products are leading the way in services with our team compliance and allows the Group of caring and dedicated to plan for changes in legislation services colleagues before they are introduced and the power of the SAGE BUSINESS CLOUD Sage Business Cloud is a suite of unified solutions that add high-value with common services, so customers can integrate and migrate data across solutions. This is supported by a rich and robust marketplace with almost 1,000 ISV apps and emerging tech across artificial intelligence, machine learning and automation Cloud connected and Cloud native solutions hybrid solutions Sage X3 Sage Intacct Medium businesses Sage 200c Sage People Small businesses Sage 50c Sage Accounting Sage 50cloud and Sage 200cloud provide the power Sage Accounting, Sage Intacct and Sage People and productivity of the desktop with the freedom provide a fully functional and flexible cloud native and security of the cloud. Sage continues to solution with open APIs, giving access to a wide invest in these solutions, building cloud ecosystem of partners and ISVs. functionality so customers can access more of the benefits the cloud brings. Sage has a strong digital and direct sales presence, supported by a global network of partners: 100,000 40,000 1,000 Dozens Accountants who advise and Value Added Resellers (VARs) Independent Software of Strategic Alliances sell Sage solutions who sell and implement Vendors (ISVs) who add with some of the biggest Sage solutions further functionality and names in technology vertical customisation to Sage solutions Read more about our solutions on page 29 OUR BUSINESS MODEL DELIVERING VALUE FOR THE WAY AHEAD INPUTS HOW WE ATTRACT AND RETAIN CUSTOMERS Trusted advisor AWARENESS ADOPT A trusted brand providing market leading customer service. & LAND Local knowledge Attract new customers New customers sign Our deep understanding of local regulation to Sage through brand up to Sage Business keeps our customers compliant and allows us to plan for new legislation on the horizon. awareness, targeted Cloud solutions on website campaigns subscription People and the sage.com Caring and committed colleagues, embracing website Customers on old Sage behaviours and values and invested licences are in driving success for our customers. Offer guides and reactivated and join Routes to market trials to prospective Sage on subscription Investing in our multi-channel approach of customers and cloud solutions direct sales channels, business partners and accountants helps us grow in our markets.