The Sage Group plc

Good morning, everyone. Welcome to the Q1 Trading Update call for the Sage Group. Your speakers today will be Steve Hare, Chief Executive Officer, and Jackie Carton, Chief Financial Officer. After a short presentation, there will be a question and answer session. To ask a question, you'll need to press star 1 and 1 in your telephone. I would now like to hand the conference over to Mr. Hare. Please go ahead.

Thank you very much, and good morning to everyone. And as always, thank you for joining us. I'm really pleased to be joined this morning by Jackie Carton, who's a new CFO, as you know, started on the 1st of January. And without further ado, I'm going to hand over to Jackie, who's going to talk us through the Q1 performance, and then we'll open up for some questions. So over to you, Jackie.

Thanks, Steve. Good morning, everyone. So I'm pleased to say that SAGE has made a strong start to the year. with growth strengthening across our key regions. As a result, total revenue for the group increased by 10% to 674 million. In North America, revenue grew by 13% to 304 million. That was driven by strong performance from Sage Intact and was supported by continued growth in Sage 200 and Sage 50. In the UKIA region, revenue increased by 10% to 194 million. This reflects further rapid scaling of Sage Intact and strong growth in Sage Accounting and Sage 15. And in Europe, revenue increased by 7% to 176 million, with good levels of growth across our accounting, HR, and our payroll solutions. I'll turn now to the performance drivers. SageBiz of cloud revenue grew by 15% to $574 million. This reflects good strategic progress and continued investment in our cloud and AI-acquired solutions. Within this, quite native revenue grew by 24% to $253 million, supported by continued strength in new customer acquisition. And quite connected, that has also delivered good levels of growth driven by both existing and new customers. For courier revenue, that increased by 10% to $675 million and reflects continued momentum in ARR. This includes subscription revenue growth of 12%, which takes subscription penetration to 84%. And on an organic basis, total revenue for the group increased to $673 million, with growth accelerating to 10%. And finally, turning to the outlook. Underpinned by a strong first quarter, we reiterate our guidance for the full year. Organic total revenue growth is expected to be 90% or above, and we expect operating margins to continue to trend upwards at FY26 and beyond. So to conclude, SAGE has made a strong start to the year. We're executing our strategy. We're continuing to innovate across our platform. And in turn, this is driving efficient, sustainable growth for our stakeholders. Thank you very much. Steve and I will be delighted to take 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 wait for your question, please press star 1 and 1 again. Once again, 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 compile the Q&A roster. This will take a few moments. Star 1 1 on your telephone and wait for your name to be announced. To withdraw your question, please press star 1, 1 again. 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.

Hi, good morning, Steve. Good morning, Jackie. And congratulations on a good first quarter, Jackie, as CFO. Tim, if I could, just first of all, could you give us a little bit more colour? We've obviously seen acceleration in the business first in the fourth quarter and again in this quarter. Maybe just give us a little bit more insight into what's changing at the product level to give us that acceleration. And I'd be particularly interested in interacting with the UK on getting anything you can help us with on scale and growth for that, because that obviously seems to be impacting the business nicely now. And then secondly, you talked about continued momentum in the ARR. We obviously saw acceleration there in the fourth quarter. Would a reasonable read of that comment be that we've seen a further acceleration in ARR in the first quarter, please? Thank you.

Thanks for the question, Adam. So I'll just touch upon first the overall acceleration piece, and then I'll pick up on the ARR piece. So, yes, it's been a good first quarter. We're very pleased with the performance, and importantly, it's very much in line with our plans at this stage of the year. If I give you a little bit more colour regionally, in North America, total revenue, as I said, is up 13%, and that's in comparison to 12% in FY25. Underpinning that was a strong performance in Sage Untact, with good growth across new and existing customers. And that has been supported by strong demand and high quality sales execution in the North American business. And as we referenced at the year end, we're now really starting to see the investments that we have been making in our go-to-market strategy, our vertical strategy, and our people in the North American business really starting to pay off. And that is helping drive the acceleration that you're seeing here today. And alongside that, as we said in the announcement, we've seen continued momentum in Sage 50 and Sage 200. So good broad-based growth in the North American business, driving that acceleration. And then if we touch upon the UKIA region, total revenue, that was up by 10% versus 9% in FY25. And I should point to that as being supported by rapid scaling of Sage Untact, which is now really starting to pick up traction And in particular, we've seen strength in the NCAA motion in the first quarter of the year, which is really starting to support that. And we'll give you a bit more colour around the growth in that at the first half, but the good performance there. But I would also call out in the UKIA region the strength that we've seen in stage accounting and stage 50 in particular, where we've seen really good levels of cross-sell and up-sell, which have contributed to that acceleration that you've seen overall in UKIA alongside the untaxed strength that we reference. And then finally, in Europe, solid growth there of 7%, broadly consistent with where we were in FY25 and in line with our plans for this stage of the year. We've seen broad-based growth there, but with particular success in stage 200 and stage X3 in this territory, and I would call it a good performance in particular from Iberia. So all in all, it's been a good start to the year. We've got good momentum as we enter the second quarter. And that very much supports the guidance that we've set out for the full year 26. And then if I touch upon how that sort of links through into the ARR performance. As you know, we don't formally report ARR at the first quarter. But as you've seen in Q4 of last year, we exited with strong momentum. And that has very much carried through into the first quarter in the ways that I've just touched upon. So, sequential growth for Q1 was around 2.5%, and that's ahead of where we were this time last year, at around 2%. So, a good start to the year gives us positive momentum, and as I say, really underpins the confidence that we have in the guidance that we've set out, but clearly will give you a more fulsome update at H1.

Very helpful. 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 your question.

Yeah. Hi. Good morning, Steve and Jackie. Maybe just on the organic recurring revenue growth. So we've seen that accelerate now for two quarters in a row. Any particular reasons to think that trend wouldn't continue? And then how much would you put this down to, you know, actual AI monetization driving incremental revenue upside? versus that underlying momentum you're seeing in Intact across the US and the UK, versus what you're then seeing across the cloud-connected portfolio. Thank you.

Thanks, Toby. So if I can give you a little bit of color as to how we're thinking about the guidance and the forward momentum in the business, and see if you can touch a little bit upon the AI monetization strategy. So as I've touched upon, and you can see, we've entered the year with really good momentum, and that's carried through into Q1. And we have seen strong demand and high quality sales execution across the business as a whole, which is promising. And that really sets us up well for the remainder of FY26. Now, as you know, as we head into the second half of the year, we do start to lack slightly tougher comparators. And so the guidance of 9% or above that we set out today really reflects a balanced view of these factors. The Q1 very much sets us up well to deliver that guidance and gives us good confidence and we've got strong momentum as we exit Q1. Steve, do you want to give a bit of color on the AI monetization?

Yeah, I mean, I think the way to think about it, Toby, is it's very early days. I would say that most of the momentum that you're seeing in the last couple of quarters is comes just from the underlying performance of the business. We have got some early monetization because we rolled out Sage Copilot, bundling that into some of the plans, which we then used to put an uplift through in terms of the price of those plans. But we haven't really started yet in terms of any monetization, for example, of individual agents that we're starting to launch. Very much early days. I think you should read this as a strength in the underlying performance of the business.

And Toby, if I can just add, we don't give the individual components of ARR at this stage of the year, but as a reminder, in FY25, the contribution from pricing was around 5.5%, and that was supported in particular by the rollout of AI and Copilot in the UK business. So as we continue to roll out more features and functionality and enhancements through AI capabilities, We deliver more values, and in some instances, we will take price in that way. And in the first quarter of the year, we have also rolled out co-pilot and the intelligent finance agent in the U.S. and U.K. intact businesses in the first quarter. And that sits alongside the strong cross-sell and off-sell that I referenced, as well as really good levels of NCA. So those combined set of factors sets us up well for the rest of FY26 and underpin the strength in that guidance.

Great. Thank you.

We are going to proceed with our next question. And the questions come from the line of Michael Priest from UBS. Please ask your question.

Thank you. Good morning. Just in terms of the benefit you talked of in Q4 from moving to multi-year deals with Intact in the U.S., could you maybe give some sense of how that affected growth in Q1 and your expectations for the year? And then appreciate the comments on sort of rolling out AI further into the portfolio. What percentage would you say of your revenue base has now been upgraded to sort of AI enhanced? And what's the timeline for sort of completing the full sort of rollout? Thank you.

Thanks, Michael. I'll touch first upon the multi-year contract piece, and Steve will pick up on your second question. So, yes, as you know, we introduced multi-year contracts in the second half of FY25. in the North American Intact business. And that was really focused on driving greater lifetime value through lower churn, better cross-sell and off-sell opportunities, and really importantly, aligning us to the commercials of our competitors. In terms of Q1, there is no impact on ARR, and there is no material impact on total revenue growth, either for the group or for North America. So the acceleration that you're seeing here today is very much driven by strong demand high quality phase execution across the North American business, but the group as a whole.

Yeah, Michael, in terms of the AI, the way to think about it is all of the cloud native revenue is AI enabled and we are progressively rolling out across the cloud connected base. And by the end of the calendar year, We should have broadly completed that. But the way to think about it is, obviously, AI is something which we are progressively enhancing. So, you know, the first phase of that was to roll out Sage Copilot. You know, we've just launched a finance intelligence agent for Sage Intact. But what we will start doing now is progressively across all of the product base, once we have Sage Copilot embedded, we will then add to that individual agents, which will carry out, you know, various tasks. And that will happen first in the cloud-native, but will be rapidly followed by the cloud-connected post.

Thank you.

We are now going to proceed with our next question. And the question comes from the line of Frederic Poulin from Bank of America. Please ask a question.

Hey, good morning, Steve and Jackie. If I can ask two questions around Jenny Alba more on the risk that the market is perceiving on the industry. So firstly, if you can share your views on how your business is or could be impacted by either new players like Relit or some corporates deciding to leverage NAI to change the way they deal with accounting. And second, you start to have insights on some clients that have taken up your AI solutions. You mentioned an uplift in price about one point last year at the group level, but have you seen some customers starting to again, efficiencies and potentially impacting negatives in a subscription that they have. So any comments on that would be very helpful. Thank you.

Yeah. So thanks for the question. So if we start with the risks, I've talked about this before. My view is that in many ways what's happening with AI favors incumbents, Because we have a large installed base, we have 40 years plus of experience, including compliance, including all of the insights around how our customers do business, not just, you know, the general ledger, the sort of system of record, but also their workflows, et cetera. And so, you know, the large language models are very powerful. But my view is that you get the best outcome when you combine that with your own local domain models, which take advantage of the insights that we've built up over many years. And I think there's a couple of things I would really point to. The first is that accuracy is not up for debate. So whenever you automate processes, you know, whenever you introduce AI into any part of the process, It has to do it accurately. And then the second thing is customers have to trust not just the accuracy of the day-to-day transactions, but they have to trust the compliance part of that when it comes to their tax returns, when it comes to preparing accounts, et cetera. And all my experience tells me, and that includes regularly talking to customers at the moment, You know, customers, it takes a while to build that trust. And we believe that we can take our customers on a journey where they can get the benefits of AI, but they don't need to kind of throw out everything that they've built, you know, over the last however many years they've been running their business. Which brings me to the insights. I think, you know, what people are telling me is that they're experimenting, they're adopting AI, they're seeing time savings. A number of customers have said to me that they can see, you know, five to 10 hours a week of savings, which are coming from us using AI to automate repetitive tasks. But I think generally, and remember, we're selling to CFOs in the medium segment. And although we're selling to entrepreneurs in the small segment, those entrepreneurs are taking advice from from their accountants. So, remember, I think this is a really important point that finance people, accountants are still driving the vast majority of the decision making, and they like proven solutions. Now, of course, new competitors will come in, new competitors will obviously gain customers, but I think you can see from our results We are delivering and our customers are starting to adopt our solutions. They're seeing benefits from it. And what that does is it frees up time. They can use that time to focus on growing their business. And hopefully that's the next phase. What we now see, we'll start to see, is people using that productivity gain to really invest time and energy to accelerate the growth of their businesses.

And then the thing I would add there, Fred, just to touch upon the risk piece, is whilst we don't report renewal rate by value at this stage of the year, just to give a bit of colour there, we're not seeing any impact from a churn perspective as we roll out these functionalities and push price through on that. We're seeing that good uptake that Steve is talking about, and that is translating into momentum that you're seeing in that sequential growth that we've reported today.

Perfect. Mindy, thanks.

We are now going to take one last question. And the questions come from the line of Mo Moawala from Goldman Sachs. Please ask your question.

Thank you. Morning, Steve. Morning, Jackie, and congrats on the results. I just had one. Could you give us a sense on the competitive landscape in North America? Obviously, I saw you drove some acceleration. But there was a lot of talk about Intuit kind of moving up market. But what have you seen there? And obviously, also would love to kind of get a sense of kind of how that sort of, you know, NCA strengths came through and where those customers are coming from. Thank you.

Yeah, so I think, as you know, Mo, the, you know, competitive landscape in the U.S. is always very competitive. Intuit are clearly making some inroads in terms of how long they keep their own customers and what we're not seeing is any sign of them competing for new customer acquisition where we're going to market with Sage Intact. We also haven't seen any change in the number of QuickBooks graduates that we're taking to Intacct. So, we've always said about a quarter of our new customer acquisition for Sage Intacct comes from Intuit, and that has remained consistent into Q1. Obviously, there's a number of new players, as mentioned by Frederick. And again, look, we see them in some of our verticals, particularly software. I think software is, you know, the place, SAS, where we see the most kind of new competitor activity. We've always taken an approach in the U.S. of focusing, you know, very clearly on verticalization. So we continue to be very strong in construction, in non-for-profit, healthcare, financial professional services, hospitality, et cetera. And we've also launched or relaunched X3. So we've launched X3 Cloud into the US market. And, you know, we intend to really use that to double down in the manufacturing and distribution verticals. So, you know, it remains competitive. But I think you can see from the results, obviously, we haven't broken out new customer acquisition, and what we're getting out of existing customers. But as Jackie's already alluded to, I think, you know, you can assume that it's very, very balanced growth, and we're very pleased with the NCA performance from Intact in the U.S. in Q1.

I would just add as well, as a reminder, in FY25, we delivered growth in excess of 20% for Intact in the U.S., over 50% in the U.K., And we're now also starting to build traction with the NTAC business in continental Europe, which is still in its early stages, but shows promising signs. So NTAC is an important driver of that balance group that was delivered today. That's great. Thank you.

Thank you. That concludes the question and answer session. I will now hand back to the speakers for closing remarks.

Thank you very much, everybody, for joining us today and for the questions. We very much look forward to speaking to you again at the interims in May. Have a great day.

This concludes today's conference call. Thank you all for participating. You may now disconnect your lines. Thank you.