The Sage Group plc

Good morning, everyone, and welcome to Sage's Q1 Trading Update. I'll briefly run through the key numbers and the performance of the business. And after that, we can open for Q&A. Sage has made a strong start to the year, delivering revenue growth in line with our expectations. Total revenue for the group increased by 10% to 612 million. driven by broad-based growth across all regions. In North America, revenue grew by 11% to $279 million, with a good performance in Sage Intact, together with continuing growth in Sage 200 and Sage 50. In the UKIA region, revenue grew by 9% to $176 million, This was driven by strong progress in Sage Intact, together with further success in Sage Accounting, Sage Payroll, and Sage 50. And in Europe, revenue increased by 8% to 157 million, with a strong performance across our accounting, HR, and payroll solutions.

Turning now to the main performance drivers,

Sage business cloud revenue grew by 13% to just over 500 million, reflecting good strategic progress as we further expand our global cloud solutions. Within this, cloud native revenue grew by 22% to 208 million. And importantly, growth remained well balanced between new and existing customers. Recurring revenue increased by 10% to 595 million, driven by continued momentum in ARR. This includes subscription revenue growth of 12%, resulting in subscription penetration of 83%. On an organic basis, total revenue increased by 9% to 611 million. And finishing on the outlook, with first quarter growth in line with our plan, we reiterate our guidance for the full year. Organic total revenue growth is expected to be 9% or above. And we expect operating margins to trend upwards in FY25 and beyond. And so in summary, SAGE has made a strong start to the year as we continue to execute on our strategy and focus on delivering sustainable, efficient growth.

Thank you, and now let's open for questions.

Thank you, sir. As a reminder, to ask a question, please press star 1 and 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1 and 1 again. Once again, please press star 1 and 1 on your telephone and wait for your name to be announced. We are now going to proceed with our first question. And the questions come from the line of Adam Wood from Morgan Stanley. Please ask your question. Your line is opened.

Hi, good morning. Thanks for taking the question. I wonder if you could just give us a little update on the key growth drivers that you're seeing by region, maybe especially what you're seeing on changes on the macro side versus what you're seeing on benefits. from product growth as the products that you've launched across the various regions start to ramp up and gain more traction? Thank you.

Alan, good morning. Thank you. Look, first of all, as you can see from the announcements, this has been a strong quarter for Sage. We've delivered underlying revenue growth of 10%. That's up against full year FY24 of 9%. and is very much in line with our full plan for the year. We've seen good growth in North America. Total revenues up by 11%. That's just slightly down on the 12% that we saw in full year FY24. But it was a good performance from Sage Intact of an increasingly larger base and also good continued growth across the portfolio in Sage 200 and Sage 50. North America, don't forget, is our largest region. It remains robust and it's our fastest growing business. UKIA, that was a very strong performance as well. That's up by 9% in Q1 against 8% in FY24. Particularly strong growth in Sage Intacct. What we saw in the second half of last year has continued into Q1, particularly through MCA. And we also had good success in our cloud solutions for the small business portfolios, supported also by Sage 200 and Sage 50. And in Europe, revenues are up by 8% compared to 6% for the full year in FY24. And that comes from a strong performance across our full portfolio products, accounting, HR and payroll solutions. So all in all, it's a good start to the year. It gives us good momentum as we enter Q2 and it supports our guidance for the full year. And then I think secondly, in terms of macro, we haven't seen a material change from the second half of last year. As you know, the SMBs, they continue to navigate this uncertain economic environments, but conditions are stable and we haven't seen a deterioration. And, you know, as I often say on these calls, our solutions save our customers time. The digitization of back offices drives efficiency and enables our business owners to focus on growing their business. And then last, in terms of the competitive environments, we've seen no material change there either.

Thank you. Thank you.

Thank you.

We are now going to proceed with our next question. And the questions come from the line of Toby Ogg from JP Morgan. Please ask a question.

Yeah, hi, good morning, and thanks for the question. Perhaps you could just touch on the sequential ARR evolution in Q1. I know you had a strong Q4 sequential rate of growth, so it would be good to hear how the sequentials have evolved in Q1 and then just anything you could call out as well in terms of seasonality wise to consider here going forward.

Thank you. Yes, thank you. Thank you very much indeed, Toby.

First of all, in terms of sequential AR, as we all know, formally report ARR for half year and full year. But we did exit FY24 with strong ARR growth of 11%. Q1, we've seen sequential growth of around 2%. And that's broadly in line with Q1, FY24. So it's a strong start to the period. It's in line with our plan and it very much underpins the revenue guidance that we've given. Seasonality, there's not too much seasonality in our business, but noticeably towards the end of the Q1 period around the holiday season, we do see at times a slight softening in demand and sales execution.

Thank you. Thank you.

Thank you.

We are now going to proceed with our next question. And the questions come from the line of Frederick Boulan from Bank of America. Please ask your question.

Hi, good morning, Jonathan. If I can ask around your AI pipeline, I mean, you've kind of talked about the traction you've seen on all the pilots you've done. If you can expand a little bit on the pricing strategy, traction you expect, and any kind of impact on your I mean, when do you think that's going to be a material driver for the business? And then, I mean, you commented on competition. I mean, no material change there. Can you maybe double-click a bit on what Intuit is doing, especially in the U.S. with their effort in SMBs? I mean, that potentially is a large pool of customers that are going to be that Intuit is trying to keep as a graduate, as you call it. So can you discuss a little bit if you felt a bit less inflow of customers from that source of growth? Thank you.

Yes, thank you, Frederick. First of all, on Copilot and AR, we're very pleased with the progress there. As we've said previously, it's already available in an early adopter form. We have now 11,000 active users, and that's across several key products in the UK, which is Sage Accounting, Sage 50, and Sage Insanit. And we're experiencing very good levels of traction with customers as we further scale and develop the solution. During FY25, we are going to incorporate Sage Copilot into our premium product tiers in the UK. I think just in terms of timeframe, we're starting with Sage Accounting, which we start in the next couple of months, and then we'll follow with Sage 50 and Sage Intact later in the year. And just earlier this week, we have written to customers to notify them that if you are a customer in Sage Accounting Plus, which is the premier tier for Sage accounting, we will include co-pilots together with other features. And in terms of pricing for existing customers, that will increase their average monthly installment by £10 per month or 25%. This is a small part of our revenue stream, Sage accounting in the UK, but it's indicative of the traction that we're getting and the confidence that we have in the fair value transfer that we have with regards to co-partners. And then Intuit North America. Yes, they are, you know, they have a product which is really aimed to reduce the migration from QuickBooks to Sage Intact. We have not seen an impact of that in North America. We are very strong in our verticals with very good brand and customer recognition. It's a very large economy in the U.S., and we have not seen any deterioration in the pipeline or deal completion in North America.

Thank you, Frederick. Thank you very much.

We are now going to proceed with our next question. And the questions come from the line of Charles Brennan from Jefferies. Please ask your question.

Hey, Jonathan. Thanks for taking the question. Can I just ask a number question, actually? It looks like the Q1 FX headwinds that you faced are greater than I'm modeling for H1 as a whole. If I just look at consensus, I think the implied Q2 is close to 630 million, which is perhaps a bigger sequential step up than we normally see. I haven't got round to modeling the quarterly FX phasing in detail, but Just to save me the trouble, is there a sufficient FX reversal in Q2 that leaves you comfortable with H1 consensus, or are we mismodeling the FX trends in H1? Thank you.

Charlie, thank you. You're right. So in short, the Q1 headwind from currency, from FX, was about 3%. Q2 though, that will turn into, as we sit here today, at the end of January, that will turn into a small tunnel wind. And, you know, obviously we'll keep you posted as we go through the year quarter by quarter. You touched on guidance for the half year and full year. When we guide to the full year, we've entered fy25 with good momentum q1 was a strong performance as you can see in line with our plan we are confident in our four-year guidance it's based on the deal closure rate that we've got at the moment and also on the pipeline and that leads us if we sit here today to be very comfortable with consensus with total revenue growth Currently sitting at 9.2%. But as I said, we will update you during the course of the year.

Thank you. Thank you.

We are now going to proceed with our next question. And the questions come from the line of Balaji Tirupati from Citi. Please ask your question.

Hello. Good morning. Thanks for taking my questions. Two from my side, if I may. Firstly, could you comment on potential impact from UK mandating the report of benefits in kind via payroll software? Are you expecting this to support payroll momentum in the region? And second question is follow up on North America. Could you share any incremental color on how the client purchase behavior has evolved since the US election, and if you are seeing any changes in pipeline build there?

Thank you. In terms of the second question, is there any change in the macro in the UK since the election? We, as I said right up front, we operate across sort of a suite of sort of major European and North American economies. If you take them as a whole, if you take them as a whole, we haven't seen material change from the second half of last year. asked around the uk we have not seen an impact yet um and and don't forget though that the pipeline or a sage intact sale which is a significant driver of growth now in the uk is about three months uh and so we must rather look at you know some sales performance lead generation on a quarter by quarter basis which gives us a much more reliable underlying trend And then in terms of mandating of digitization of reporting by governments, whether in the UK or elsewhere, that is an underlying secular trend across all of our major territories. Each incremental change the governments make clearly is a tailwind to us. We will, from time to time, call out where there is a significant or material opportunity that would drive accelerated growth. This is not one of those. It is part of the secular trend. of digitization, not only of our customers' back offices, but the way they interface with government, tax authorities, and other regulatory bodies. Thank you. Thank you, Balaji.

Thanks for answering the question. Actually, the first question was more around US election. So are you seeing any changes in the states after elections in November?

Not yet. Not yet in terms of execution of opportunities through the sales pipeline or sales completion. But I do say Sage Interactive is a three-month sales cycle, effectively.

Very clear. Thanks a lot.

In the interest of time, we are now going to proceed with one last question.

And the questions come from the line of Michael Breast from UBS. Please ask your question.

Great. Good morning, Jonathan and James. In terms of headcount last year, obviously margins were good and headcount fell by about 5%. Just wonder if you can give some detail on where you found the efficiencies and whether you think that's a number that could continue to trend lower this year. And then just very quickly, can you give an update on Sage Active and take up in Europe? where it sits, if you like, in the product portfolio relative to the historical products like page 50 and 100. Thank you.

Michael, thanks very much. In terms of headcounts, you're absolutely right. In the course of FY24, we saw a reduction of about 5% down to 11,000 total headcounts as we exited last year. Those savings were made across the piece. First of all, we focused on very careful measured hiring plans to ensure that we were allocating the resource to exactly the right areas of business. And then secondly, a careful continuous refinement of the shape of the P&L that we want between various functions and regions. So no sort of standout big redundancy programs with big pivots in our headcount, but a very clear focus on the number and quality of the hiring that we were doing. In terms of going forward, we've now had two years with the headcount flat and decreased by 5%. We're growing the business at around 10%, so we do anticipate that the headcount will begin to move up during the course of FY25, but I can reassure you that that headcount increase and the total cost of employment for us is about 70% of our total cost base. I can assure you that that will increase at a significantly slower rate than social revenue. And then in terms of Sage Active, very early signs are promising. As you know, all of our new cloud products in new territories, it takes two or three years before traction really builds. So it's not material at this stage. The customer base is beginning to become familiar with it. Our sales teams, you know, are working with it. But it's just like Sage Intact in the UK, where if you recall, first of all, three years, it was a slow pick up, a careful pick up. And then once you get past the two to three year mark, there is accelerated growth. And we called out the numbers for sage intact in the UK at the end of last year. And that's a very significant pick up that we saw. So we'll keep you updated, but nothing material to report at this stage.

Thank you.

We will now end the question and answer session due to the time constraint. And I would now like to hand back to Mr. Howell for closing remarks.

As ever, thank you for your time. Thank you for your good questions. And James and the team, as always, will be available over the next few days to take any follow-up questions that you'd like to raise. Thank you very much indeed. Goodbye.