The Sage Group plc

Good morning, everyone. As usual, I'll briefly run through the key numbers and the performance of the business. And after that, we can open for Q&A. And as a reminder, all numbers in the trading statement are reported on an underlying basis and less otherwise stated. Sage has delivered a strong performance throughout the first nine months in line with expectations, growing both recurring and total revenue by double digits. We increased recurring revenue by 12% to over 1.5 billion. This was driven by continued strong growth in Sage Business Cloud of 29% to 1.2 billion, with growth well balanced between new and existing customers. Subscription revenue increased by 17% to nearly 1.3 billion, resulting in subscription penetration of 79% up from 74% this time last year. Regionally, North America increased recurring revenue by 16% to $702 million, driven by strength in Sage Intact, together with a good performance across the Sage 200 and Sage 50 cloud franchises. In the UK IA region, recurring revenue grew by 11% to $456 million. This was driven by continued progress in cloud native, including Sage Intact and Sage's small business solutions, alongside growth in Sage 50 Cloud. And in Europe, recurring revenue grew by 7% to $404 million, with good growth across Sage Business Cloud, including Sage 200 Cloud and Sage HR. This growth was partly offset by the Swiss disposal in Q1 of last year. Looking at the portfolio view, recurring revenue for the future Sage Business Cloud opportunity increased by 13% to over $1.4 billion. Cloud-native revenue grew by 36% to $436 million. This reflects continuing good levels of new customer acquisition together with the impact of acquisitions in FY22. And Cloud Connected has also continued to grow strongly, driven by existing and new customers, together with migrations to Sage Business Cloud. As a result, Sage Business Cloud penetration has increased to 83%, up from 73% last year, with more customers able to connect to the Sage network. Finally, recurring revenue in the non-Sage Business Cloud portfolio increased by 3% to $113 million. Moving on to the Q3 standalone, recurring revenue increased by 11% to $523 million against a strengthening comparator driven by continued growth across Sage Business Cloud. Total revenue for the first nine months grew by 10% to $1.6 billion, and for Q3, Total revenue also grew by 10% to $543 million. Other revenue continued to decline in line with our strategy. Finishing on the outlook, with growth in the first nine months in line with our plan, we reiterate our full-year guidance as set out at the first half. Organic recurring revenue growth is expected to be in the region of 11%. other revenue will continue to decline in line with strategy. And we expect operating margins to trend upwards in FY23 and beyond. And so in summary, Sage has delivered a strong performance throughout the first nine months in line with expectations. And we enter the final quarter with strong momentum as we continue to focus on delivering sustainable, efficient growth. Thank you. And now let's open for questions.

Thank you. As a reminder, to ask a question, please press star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 1 again. Please stand by while we prepare your first question. The first question comes from Adam Wood at Morgan Stanley. Adam, your line is open. Please go ahead.

Hi, good morning, Jonathan, and thanks for taking the question. I just wanted to clarify, obviously on the recurring side, we've seen a very slight slowdown in the third quarter, and the unchanged guide from the full year means we probably expect to see another very slight slowdown in the fourth quarter. You've obviously flagged that you've got tougher comparisons on the second half. I just wanted to get a confirmation that it is just still those tough base comps or slightly tougher base comps that's driving that, and there's no kind of underlying change in the macro or the market that you're seeing, that you're signaling with that, please. Thank you.

Thank you, Adam. Yes, and I think first of all, just to say, we've performed really in line with our expectations across all of the regions. And, you know, as you said, you know, we've seen 12% recurring revenue growth reported at the first half. We've seen 12% recurring revenue growth reported Q3 year to date, and 11% Q3 standalone. That profile is in line with our expectations. it's driven by the stronger comparators that we're facing, particularly in North America and UKIA, as we move into Q3 and Q4, as revenue ramped up significantly this time last year. I think the other thing is just worth calling out as well is that total revenue growth now is at 10%. That was the same at the half-year, at the nine-month stage, but also on Q3 standalone, and that's an important milestone for us. In terms of the macro, we still have seen no material impact of the macroeconomic backdrop. And that's driven by probably a couple of things. First of all, we provide mission-critical services and functionality to our ISME customers, which enables them to run their business as they move forward. And then secondly, and most importantly, is that the digitization, of accounting software, payroll software, HR software, other back office services is moving apace in our customer base. It drives deep efficiencies and resilience, and that is a secular trend that we're seeing coming through in these numbers, and we anticipate we'll see in future quarters and years. So nothing further really to report over and above what's in the announcement. Perfect. I appreciate the color. Thank you.

Thank you. Please stand by for your next question. Your next question comes from James Goodman at Barclays. James, your line is open. Please go ahead.

Yeah, morning. Thanks very much. Apologies if I missed it, but Jonathan, could you just give the usual precise commentary around the ARR development sequentially in the quarter, maybe nuanced between new customer acquisition and NRR? Thank you.

Yes, just as you know, we don't report formally on ARR at the Q1 or Q3 stage. We do that at half year and full year. But as normal, we can give you some color. So ARR sequential growth was 2% in Q1 of this year, 3% in Q2, and 3% in Q3. And that is very consistent with what we were seeing this time last year as well. And that sort of growth, sequential growth in ARR underpins our confidence in the guidance that we gave at the half year of 11% recurring revenue and also in consensus, which is in the region of 11% as well. So I think that gives you some more color around the momentum we're seeing at the moment.

Yeah, that's very clear in line with last year. Thank you. And just maybe with two months to go now only for the full year, would you be able to provide any more colour or context around the margin progression that you're expecting for the second half or too early still to say?

Thank you. Good question. We reported first half margin of 20.8%. That was a 60 basis points improvement on the prior year on a constant currency basis. FY23 full year consensus is 20.8% and we are comfortable with that for the full year consensus. As you know, we guide with regards to margin on a full year basis. We give you an update at the half year on how we performed on margin. As I say, we're comfortable with consensus being a 20.8%. I think the other important thing just to add on margin is, as you can see, and as we strategically set out, that we do intend and believe it's appropriate to keep expanding the margin as we move forward into future years. And that is very consistent with what we've been saying in the past, consistent with what you're seeing this year, and is very much part of the strategic and operational plan for the business. Very clear. Thank you.

Thank you. Please stand by for your next question. Your next question comes from Toby Og at JP Morgan. Toby, your line is open. Please go ahead.

Yes. Hey, morning, Jonathan. A couple of questions from me. Just on Intact, could you just give us an update on how Intact trended in Q3, and then just on the Intac piece outside the US, I know it's small, 18 million ARR at the last full year, but still growing very quickly. Could you just give us an update on how things are tracking here for Intac outside of the US, and specifically on the UK, how's the traction as it stands today? What stage are you at currently in the UK with the partner ecosystem, and what are the next steps for driving further adoption here in the UK? Thank you.

Yes, just in terms of Intacct, in North America, that's still running around 30% growth in broad terms and very strong NCA and also strong renewal rate by value. If we look outside of the US, Intacct and cloud-native products are doing very well in terms of growth, clearly off a much smaller base. But just to give you a feel for that, if Intact North America is running at about 30%, we just reported cloud-native recurring revenue growing at 36%. And so therefore, by definition, you're seeing Intact and other cloud-native products running way in excess of 40% growth outside of the US. And just to sort of, you know, Intact now is being rolled out. It was launched in France in FY23. Critically, Sage Intact Manufacturing, which is an important vertical for us, has now been launched in France, UK, IA, and North America. And Sage Active, the other sort of new cloud-native product, has been launched in France and Spain already. So this is coming off small bases in these new territories. It normally takes a period of time for the customer demand to materialize. It takes a bit of time, as you say, to get the partner channel going. But everything that we've seen in rolling out in fact to the English speaking territories two or three years ago for the first time, once that ramps up, it drives good, strong growth. That's great.

Thank you. Thank you. Please stand by for your next question. Your next question comes from Frederick Boulan at Bank of America. Frederick, your line is open. Please go ahead.

Hi. Good morning, Jonathan. Quick question on competition, in particular QuickBooks. Do you see any specific opportunity in the French market with them retrenching from there from next year? Any other changes in competition on your call-out, either in the same vein of competition some competitors maybe investing less in some markets, or on the contrary, pushing harder in some areas. So updates on the general competitive landscape would be great.

Yes. In broad terms, the competitive landscape hasn't really changed. If you look across all of our geographies and all of the segments that we operate in, we are very confident in the offering that we have got against our competitors now. And if you look at the renewal rate by value, it tells a bit of a story. We've, you know, we're still running at a renewal rate by value with our existing customer base in line with what we reported for half year. That was 101%. That was the same as the full year FY22, which was 100%. So that's an 18 month to two year trend of 101%. This is critical with regards to the competition. We have been sensible. and understanding in the price increases that we've put through, which is about 4% to 4.5%. Some of our competitors have not done that, and we think that is the right time to show support and confidence in our customer base. I think also the other element is cross-sell and up-sell, which has been doing very strongly indeed across our portfolio, but particularly in cloud native in North America. And so intact has a very strong record of that and to your point on competition Not only maintaining very high levels of NCA against the medium segment competitors there, but also with where we're able to have a significantly higher than that 101% Renewal rate by value. So no no material changes if anything You know, we're the the strategy that we've got is are linked to the pricing that we've got and the new functionality is giving us an advantage at the moment.

Great. Thank you very much. Thank you. Please stand by for your next question. Your next question comes from Charles Brennan at Jefferies. Charles, your line is open.

Please go ahead. Perfect. Thanks. Morning, Jonathan. Just a couple of questions for me. The first is back on ARR. It's obviously ARR that will set the tone into next year. 3% sequential growth in Q2 and Q3, I think, is exactly the same as the trends last year. But can you just give us some sense of what normal Q4 seasonality looks like? I think last year it was plus 4% in Q4. Do you regard that as normal seasonality or was that a significantly above normal seasonality quarter? And then secondly, if I think more medium term, you've never seen low double digit growth as the ceiling growth aspiration for Sage. You've always considered faster growth scenarios than that. In order for Sage to be a teen sustainable growth business, Which of the geographies do you think have got to drive that? Have we finally got to see more progress in Europe? Is that the region that's going to drive that growth acceleration? Thank you.

Thank you. Thank you for the questions. First of all, in terms of ARR, as we said, sequentially it's 2%, 3%, 3%, and that is running against these tougher comparators. in Q3 and Q4, and that 4% that you called out in Q4 last year is one of those tougher comparators, which is what has been taken into account in the guidance that we've given today. Now, looking into the future, I think it's a really good question. We have said, I think at the half year and at other times, we believe that this company can move into a rule of 40 type environment. That is in part... as a result of the sort of the trend, the consistency, and broad spread resilience of the growth that we're able to deliver. And so, you know, here we are now with a total revenue growth of around 10%, which has been a long aspiration of ours once we've completed the migration. Strong growth in cloud native in particular. Some parts of that we're seeing in excess of 40%. And we believe that this is an important component of a Rule of 40 assessment. And then running in parallel with that is obviously the margin. And that margin, you know, we called out the trough in the margin as we invested particularly in product and R&D and marketing in FY21. And that once we've hit that trough, we said we will consistently begin to start improving that margin. whilst at the same time, given these growth rates, able to make considerable investment in new products and marketing. And that's exactly what we're doing. We've now been doing that for 18 months. As I say, last year was a good improvement in margin. This year, we see another good improvement coming forward, and we think that is a sustainable form of performance of this group. So I think that that rule of 40 is an important... is an important benchmark that we were aimed for in forthcoming years. And then I think, where's that going to come from? Look, North America is important. At these consistent growth rates, it will begin to get to 50% of total group revenue. The target market is very large in North America and considerably higher than our other territories. UK is strong and resilient, and as you can see, is doing double-digit growth. And I think also, as you raise, is Europe. And we've been doing these half-year and full-year and quarterly updates now for some time, and we said on a number of occasions, we will get to launching cloud-native products in continental Europe. We've focused at first in the migrations in North America and UKIA, And that time has now come for Europe with those products that I listed earlier in the call. So we feel confident across the portfolio for slightly different reasons, but it underscores our confidence in this business attaining a rule of 40 type of valuation.

Perfect. Thank you so much.

Thank you. We'll now take our last question. Please stand by. Your last question comes from Rahul Chopra at HSBC. Rahul, your line is open. Please go ahead.

Yes, good morning. I have a couple of questions. One, could you please discuss the upsell opportunity from AI productivity tools to install base? And how should we think about that in terms of your margin versus growth development? And the follow-up question would be, when you're talking about rule of 40, just wanted to get a sense of where do you think we should think, like, you know, in the medium term? Should it be, like, 10-30 or 8-32 or, like, 12-28 in terms of growth versus margin profile? Just what you're thinking in terms of split between those, please.

Thank you. AI is a very important opportunity for us, and it's twofold. One is driving further efficiencies in automation, in our own business, and we've done a lot of that already very successfully. But probably more importantly is the efficiency gains and the smart working and the productivity that this can drive to our SME customer base. And I think the opportunities there are very considerable. We already have AI embedded in some of our products, data extraction, error detection, and transaction classification are all embedded in our products and working and have been for some time. We have the capabilities and the resource to be able to continue to invest in AI. And as you know, we've called out on a number of occasions that our ongoing run rate of investment in R&D and technology is about 16 or 17% of recurring revenue. That will give us ample to be able to invest in ai particularly as we are growing the business um you know rapidly at the moment um and and so you know we will update you know appropriately as we move through future quarters and years on the developments in this area for us and for our customers um and then rule of 40 we you know we we don't give medium-term guidance um uh we we believe that we can attain the rule of 40 we've given you some good trends of what we can achieve in revenue growth and also in margin and i think at this stage we'll leave it at that but you you can understand the dynamics of the business thank you very much thank you very much indeed everyone thank you for your questions and attention um clearly if you have any further questions james and the team will be available today and you know over the forthcoming week or so to deal with any questions that you may have thank you very much indeed goodbye