The Sage Group plc

Good morning, everyone. Welcome to the Q3 trading update call for the Sage Group. Your speakers today will be Stephen Hare, Chief Executive Officer, and Jacqui Cartin, Chief Financial Officer. After a short presentation, there will be a question and answer session. To ask a question, you will need to press star 1 and 1. I would now like to hand the conference over to Ms. Cartin. Please go ahead.

Good morning, everyone, and thanks for joining us. I'll start by taking you through our performance in the first nine months of the year, and after that, Steve and I will be happy to take your questions. Sage has delivered an excellent performance. Through focused execution, we've achieved broad-based acceleration across our key products and regions. This is underpinned by the investments that we're making in our platform and AI capabilities, which we continue to enhance the value we deliver to our customers. Revenue increased by 11%, 2.1 billion in the first nine months, reflecting strong demand for our solutions from both new and existing customers. This is supported by the expansion of AI-powered features across the portfolio, including growth in Sage co-pilot and agentic capabilities. Today, Sage's AI tools are available to over 600,000 customers. That's up more than 20% since we reported our half-year results in May. and adoption continues to grow as customers increasingly rely on Sage for critical finance, HR and payroll workflows where getting it right is essential. I'm moving to the regional view. In North America, revenue increased by 14% to 932 million with continued momentum in Sage Intact supported by our vertical go-to-market approach. We also saw good growth in Sage 50 as well as in Sage 200 Payroll and HR. In the UKAA, revenue grew by 10% to 602 million. Sage Intact continues to scale rapidly alongside further strong growth in Sage 50. Our cloud-native small business suite including Sage Accounting also performed well when momentum and embedded services continues to build. And in Europe, revenue increased by 7% to 528 million. This reflects strength in Sage X3 and Sage 200, broader portfolio growth and increasing traction in Sage Untact. And underpinning all of this is the expansion of Sage Business Cloud Revenue, which grew at 15% to 1.8 billion, driven by strength across both native and connected. Cloud Native was particularly strong, growing at 25% to 794 million. And moving to recurring revenue, this grew by 11% to 2 billion, reflecting continued momentum in ARR. And subscription revenue increased by 13% to over 1.7 billion, with subscription penetration reaching 84% and continuing to rise. For Q3 on a standalone basis, revenue was almost 700 million, with growth accelerating to 12%. And on an organic basis, revenue for the first nine months was over 2 billion, an increase of 10%. So turning to the outlook. Reflecting our performance in the year to date, we reiterate our full year guidance as set out at the half year. We expect organic revenue growth to be above 9% and operating margins to trend upwards in FY26 and beyond. as we continue to focus on efficiently scaling the grip. So to conclude, Sage has delivered an excellent performance in the first nine months of the year with momentum building across the grip. We're strengthening our products, broadening our ecosystem and deepening the value that we create across our platform. By combining trusted technology, intelligent innovation and human expertise, we're helping customers run their businesses with greater productivity, Insight and Confidence went further strengthening the quality resilience and growth potential of SAGE underpinned by disciplined execution this gives us confidence in our ability to continue delivering sustainable efficient growth over the long term thank you very much and Steve and I would now be delighted to take your questions

As a reminder, to ask a question, you will need to 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. Please stand by while we compile a Q&A roster. Our first question comes from the line of George Webb of Morgan Stanley. Please go ahead. Your line is open.

Hey morning, Stephen, Jacqui, and congrats on the continued good results. A couple of questions if I can. Firstly, just on the headline number, it looks like there's a sequential acceleration in the business in Q3 versus the first half stage. I think the organic revenues were closer to 11% in Q3 than 10% at the first half. Was that acceleration broad-based, or could you add a bit more color around what drove that acceleration in Q3? and then the secondly turning to AI, could you add some color on what you're seeing in terms of customer engagement with Sage Copilot and whether particular workflows are seeing especially strong usage? Thank you.

Thanks George. So let me give you a little bit of color in terms of the acceleration drivers and I'll give you a bit of a flavor also for the sequential piece that we're seeing from an ARR perspective and Steve can touch upon sort of what we're seeing from an AI adoption and engagement perspective. So yes, overall, as I said in my opening remarks, we're very pleased with the performance. It's been a strong first nine months. Underlying total revenue growth of 11%, which is very much in line with our expectations. This reflects much of the same trends that I touched upon in the first half. We entered FY26 with strong momentum and we have sustained that through the first three quarters and we're now in the fourth consecutive quarter of acceleration. That's been underpinned by strong growth across the group but in particular I would call out both North America and the UKIA which has sustained the double-digit growth that we reported at the first half and importantly that has been underpinned by a couple of factors. First and foremost we're seeing strong underlying demand coming across the group and that's been supported by high quality disciplined execution from a go-to-market perspective. and that is now increasingly being coupled with the growing impact of the monetization of AI features and functionality which we are increasingly rolling out across the group. Critically though, we are seeing a good balance of growth coming through from both new and existing customers which is very much indicative of what we're seeing in terms of trends of both new customers and our existing base coming to us and looking to us to help them digitize workflows and make the most of AI in doing so. Now in terms of how that shows up from an ARR perspective as you know we don't report that in detail at this stage but what I will say is as you know we reported two and a half percent sequential growth in the first two quarters of the year which is ahead of where we were last year in Q3 we are slightly ahead of two percent which again is an acceleration versus this time last year and that's been underpinned by the factors that I've set out so that gives us good momentum as we enter the final quarter of the year and really underpins our confidence both in the durability of the groups moving forward but also in the guidance that we've reiterated today. And Steve, do you want to pick up on the AI?

Yeah, I mean, I think a few things on AI. I think first of all, you know, I think the engagement from all customers, both existing customers but also prospects. People are very focused on, you know, high curiosity, what can it do for me? making sure that they're making decisions which are sustainable over the long term so obviously things are changing very quickly so particularly with future prospects people are very focused on you know if if i purchase something is this going to still be relevant um you know in two or three years time so you know ai you can trust um trust within your workflows remains a very important point in terms of the types of workflows particularly mid-market accounts payable so over half of new Sage Intacct customers are taking the AI powered accounts payable module and also we've said this in the past but I think you know both small and mid-sized customers very interested in anything which allows them to detect anomalies so using AI to detect unusual transactions and and surface things that therefore a human needs to look at and I think the final thing I would say is particularly as you look forward to the future you know particularly in the UK and Europe there are some regulatory tailwinds in the UK and making tax digital is you know really picking up for those smaller customers and across Europe you know we're seeing increasing traction around e-invoicing and all of these features are AI powered.

Appreciate that. Thank you.

Thank you. We will now take our next question. Please stand by. Our next question comes from the line of Balaji Tirubati from Citi. Please go ahead. Your line is open.

Thank you. Hi. Good morning and congratulations from my side as well on another solid quarter. Thanks for taking my questions too, if I may. Firstly, could you share how you see Dynamics into fourth quarter and fiscal 2027? And I do appreciate base compass tougher, but if I look at your 2026 outlook, Would you say that with more than 9% revenue growth guidance you are not ruling out 10% or higher growth this year? And then for a second question if you could update on how the price contribution in your growth is shaping in 2026 and as your Sage accounting and Sage 50 customers for whom Copilot was rolled out earlier as they come for renewal are you seeing the desired uptake of Copilot and uptick in pricing? Thank you.

Thanks Balaji. So if I just touch first on your question around the guidance piece, and I can give you a little bit of update on how we're seeing pricing and states can chip in in terms of the customer behaviour piece as well. So look, from a guidance perspective, as I said, we've seen a strong performance in the first nine months and that's in line with expectations. and we are entering the fourth quarter with a good level of momentum that's supported by a number of quarters of acceleration and that's consistent with what we're saying from the sequential growth perspective that I just set out but as you reference as we head into the final quarter of the year we do lack that tougher comparator which is reflective of that particularly strong Q4 25 that we delivered at the back end of last year and what that really does is it gives us a more balanced profile of growth for the full year which is entirely consistent with what we said earlier on in the year so consistent with what we were expecting and that's what's reflected in the guidance that we're setting out today but really importantly we are investing behind the opportunities that we see in the market both in terms of growth for Q4 but also FY27 and beyond so we've got good levels of confidence there. And then in terms of the pricing trends, as you know, we don't give sort of the individual components of renewal rate by value at this stage of the year. But the trends that I set out at the first half have really very much continued. We're seeing good balance growth across New Year and existing. And the renewal rates specifically continue to benefit from a combination of pricing and uptick and cross sell and upsell. And really importantly, that continuation of the low and stable churns. At H1, we set out pricing contribution at around five and a half percent, which was consistent with where we were at FY25. And that really reflects the rollout of additional features and functionality and product innovation that we're delivering, including things like Sage co-pilots and other AI capabilities. And as I said in the opening remarks, we now have over 600,000 customers who have AI enabled features included. and what I will say in terms of the customer behaviors like to that we're not seeing any increases in churn we're very focused on the adoption piece particularly with co-pilot and then as Steve touched upon we are increasingly now seeing growing attach rates of standalone functionality like the AP automation tooling in particular with an intact and then also our agents that are being rolled out gradually so the number one priority there is making sure that people adopt The only thing I would add is if you ignore the comparators for a minute, because obviously the Q4 comparators are a bit tougher.

I think when you sort of focus on the sequential growth what I would say is that you know we have a lot of confidence both in Q4 and as we look forward into FY27 that we will continue to make good quarter-on-quarter progress and I think you know to answer the earlier question from George I think in terms of you know the broad base of that growth it's important that you know we're seeing you know good progress in the renewal rate by value so we're seeing good progress in terms of our existing customers are you know adopting the features and functionality and we've always said that you know when we increase prices we we really want to make sure there's a fair value exchange and so we are delivering you know new functionality into that installed base but we also continue both in the mid market with Intact and X3 but also in small particularly with embedded services you know we continue to acquire you know material numbers of new customers and I think on stage 50 obviously a very important franchise and we have seen strong growth from stage 50 you know it's it's a combination of making sure that we are able to deploy AI enable the features into that install base but at the same time offer those customers that want to take the path a fully cloud native destination whether that be migrating to a product like Sage Intact or increasingly in particularly in the UK and the US we are offering you know a fully cloud hosted experience for Sage 50 customers so we're trying to make sure that customers are able to embrace the latest technology in the way that works for them.

That is very clear and comprehensive.

Thanks a lot, Jacqui and Steve. Thank you. We will now take our next question. Please stand by. Our next question comes from the line of Mohamed Mouawala of Goldman Sachs. Please go ahead. Your line is open.

Great. Thank you. Morning, Steve. Morning, Jacqui. And congrats on the performance as well. Two from my end. Firstly, given the revenue outperformance in Q3, how does that sort of change your thinking perhaps on the operating leverage and margin? So how should we think of kind of the pace of investment Do you look to sort of still aim for that kind of 60 bps margin or could we see some outperformance, particularly for this year? And then secondly, just coming back to some of the product initiatives, I'm just curious, I know you've been pretty good at driving some pricing, but when you think about sort of the intact opportunity, Where are you in continental Europe in particular? Is that still to come? And any other initiatives we should think of as we move into 2027? Thank you.

Thanks Mo. I'll give you a bit of an update on margin and Steve can give some colour on the NTACT internationalisation piece. From a margin perspective we now have a very consistent track record as you know of margin expansion and we are in the fourth consecutive year of that expansion and it is increasingly underpinned by a mixture of factors so with the accelerating growth that we are now posting as you point out that's driving a good level of operating leverage and that is sitting alongside an established pattern of operating efficiencies that we have now been building towards over a number of years but importantly we now are also starting to see the increasing benefits of the adoption of AI internally which is sort of enhancing that still. So all in all that really gives us good capacity to invest for innovation and growth as you see today whilst continuing to expand the margin. Now in terms of the trajectory moving forward as I said in my opening remarks we expect margins to continue to trend upwards in FY26 and beyond but we expect to be at the bottom end of that 50 to 100 basis points range as we look to continue to invest whilst we expand the margin. So we're making good progress but clearly we'll give you more of a fulsome update overall in November. Steve do you want to touch on the end tax?

Yeah and I think just to reinforce the point that Jacqui makes that you know our priority is to continue to invest for growth. We see you know significant opportunities and I think particularly if you take Intact and X3 both in the UK and Europe you know we're very focused on making sure that you know we we are the winners we are the number one player in the mid market in our core countries I think we are now seeing very strong progress with Intact in France Germany is following behind that but it is our intention that you know we think we will see very strong growth in the coming years from that franchise. We already have strong growth you know again particularly in France but also across other parts of Europe with X3 which continues to grow you know strongly double digits so I feel you know if I take a kind of midterm view across Europe with Intact and X3, I feel pretty bullish.

And yeah, Mo, just to add on that in terms of, again, we don't give the individual growth rates at this stage, but at the first half we reported growth in Intact in the U.S. was above 20% and outside the U.S. is around 50%. The trends there are to me.

That's great. Thank you.

Thanks, Mo.

We will now take our next question. Please stand by. Our next question comes from the line of Frederick Boulan of BOV. Please go ahead, your line's open.

Hey, good morning, Stephen and Jacqui. Fred at Bank America. Can you give us an update on the competitive landscape, any developments to flag maybe in the US with QuickBooks or from AI native players? Thank you. Sure. So I think, you know, probably not that different really from the comments we made at the first half. It remains a competitive space. I think it's a pretty obvious point but AI and the rollout of agents is moving very very quickly and whether you look at our established competitors or whether you look at our newer competitors you know there is uh yeah there's a lot going on and i think you know my response to that is you know we continue to offer our customers and also our prospects you know almost the best you know the best of all worlds in that you get access to the latest technology because we have obviously developed our own ai models but we also access you know the whatever intelligence is required from the various frontier models and we build that into you know workflows and into products that you that you can trust so we're orchestrating that for you so I think my summary would be it remains very competitive it probably isn't any different to how it was a quarter ago and in the end the proof points are that our churn remains very stable so we are keeping our customers and we continue to acquire new customers both in the mid market and also at the smaller end of the market and imagine particularly at the smaller end of the market using our embedded services you know with a number of the fintechs that we've signed partnerships with we are seeing Acceleration in the volume of our new customer acquisition. So I think those brief points show that we are competing effectively, but it's a very competitive space.

And Fred, I would just add to that in terms of sort of from a North American perspective, the biggest proof point there is the acceleration and the growth, which is 14% in the first nine months. That's off from 12% last year. So that gives you a flavor for sort of the progress overall. Thank you very much. Thank you, Fred.

Due to time, we will now take our last question, which comes from the line of Toby Ogg of JP Morgan. Please go ahead. Your line is open.

Yeah, hi, good morning, and thanks for the question. A couple from me, perhaps just firstly on the macro and the demand environment. Have you seen any changes here? We obviously saw towards the end of June the ceasefire with the Middle East situation, and then in July we've seen re-escalation. Have you seen any impact on customer behavior or demand through this? And then secondly, just on Europe, it looks like that accelerated in Q3 relative to Q2. Any specific drivers that are helping lift the growth rate in Europe and how sustainable do you think those drivers are? Thank you.

Thanks Toby. I'll give you a little bit of a flavour just to add to some of the points that Steve made earlier in terms of Europe and see if you can touch upon the macro. Look, from a European perspective, this is an area that is obviously ripe for opportunity in terms of the compliance tailings that we're seeing in that market. but also as we're sort of building our presence with Sage Intact, Sage Active, we do see opportunities there to do direct growth and we're well positioned in the market. In particular in the first nine months we've seen strong performance from Sage X3 in our French business, we've seen a really strong performance in our Iberian business as I touched upon in the first half. So overall it's a mixture of strong compliance tailwinds that are coming through in continental Europe a growing level of cloud adoption which has otherwise lagged other parts of the group historically and then also having good products in place that are sort of ready to start building traction and scaling.

Yeah and I would say on the macro I think there's probably two parts to this. One is how people see it impacting how they behave with us i.e. does it make them less or more likely to make purchases from Sage and then it is the impact of how they see their own their own business and what I mean by that is if I when I talk to customers you know customers are depending on which industry they're in they are very focused on the cost of you know materials that their input costs essentially and because that's where the impact of the the Middle East has the most has the most impact for them. So whether it be oil prices, driving, cost of distribution, et cetera, et cetera, these are all inflationary pressures which our customers have to pay real attention to. I think in terms of how they interact with us, in the past I have said that sometimes when you get these kind of You know, macro uncertainties, it can lead to people just taking a little bit longer to make decisions. The way I would see it at the moment is because these, you know, whether it be the Ukraine conflict or whether it be the war in the Middle East, I think people are kind of slightly looking through it now and saying, well, you know, it kind of is what it is. It'll come to the end. It comes to an end in due course. but in the meantime I need to get on with things and so if you link those two things together obviously part of what we're selling is not just you know compliance keeping you safe etc but it's also offering you productivity it's offering you efficiency it's offering you you know automation of your workflows and in some ways you know the more people see those cost pressures the more it encourages them to invest to find productivity to be able to absorb cost increases elsewhere. So I would say at the moment the kind of pipeline of interest, the engagement is strong and is largely unaffected by the ups and downs of the wider macro environment.

That's great, thank you. Thanks Toby.

Thank you. I will now pass back to the speakers for closing remarks.

Thanks everyone for joining the call today and for all of the questions. James and the AIR team will be available for any follow-ups today and Steve and I look forward to speaking with you all again in November. Thank you very much.

This concludes today's conference call thank you for participating you may now disconnect.