The Sage Group plc (SGE) Earnings Call Transcript & Summary

Good morning, and a warm welcome to Sage's 2022 Full Year Results. I'm pleased to be joined this morning by Jacqui Cartin, our Group Financial Controller and EVP of Group Finance. As Jonathan, our CFO, is on a short period of medical leave following minor surgery. But I'm very pleased to say Jonathan is recovering well and will be back in the office in a few weeks. Now I'm going to start with an overview of the key messages for today, and it has been a very good year. We've driven growth through strong execution and delivered good financial results. Firstly, the business has increasing momentum. Growth has accelerated in all regions with a strong performance across our cloud solutions. We've increased the pace of delivery of new products, which I'll talk about later, and we've made several key acquisitions to accelerate our strategy, bringing valuable new technologies, capability and talent into the group. And through our growing digital network, we're developing the next generation of AI-powered solutions that will continue to drive the success of Sage in the long-term. Secondly, our opportunity for growth is significant. Many businesses face an uncertain economic environments at the moment, but small and midsized businesses are continuing to prioritize tech investment. Our solutions are mission critical for millions of SMBs globally, helping customers to streamline processes, unlock productivity and achieve more with less. And this supports our resilient business model. Today, 95% of our revenues are recurring and 75% are on subscription. We generate significant and growing cash-backed profits, and Sage is underpinned by a strong balance sheet. And this gives me real confidence that we will deliver on our opportunities for growth. And finally, consistent execution. Building on our significant investment in the business, we're making good strategic progress, and this has resulted in a strong financial performance. Recurring revenues up by 9%. Operating profit up by 8%, with margin expanding to almost 20%. And importantly, ARR grew by 12% to over GBP 2 billion and this positions us well for the year ahead. During the year, we completed our disposal program, and we're now focused on efficiently scaling the group and growing revenue and earnings in absolute terms. But for now, I'm going to hand over to Jacqui for the financial review.

Good morning, everyone, and thanks, Steve, for the introduction. It's great to be here today to share our financial results for FY '22. I'm going to talk you through the highlights, some further detail on our performance; and finally, the outlook for FY '23. In summary, as Steve mentioned, it's been another strong year for Sage. We've continued to execute in line with our strategy with growth accelerating and so we've exited the year slightly ahead of our expectations. So let's look at the highlights. Recurring revenue has grown by over 9%, which is above the top end of our guided range. This reflects increasing cloud momentum in all regions. Operating margin has increased to 19.9%, trending upwards from last year, as we focus on efficiently scaling the business. Finally, our cash conversion has remained strong at 107%, driven by continued growth in subscription revenue and good working capital management. So let me give you some more detail on the key growth drivers, which really highlight the progress that we've made. ARR growth has increased to 12%, that's up from 8% this time last year. This reflects strong performance across all regions, underpinned by balanced growth from both new and existing customers. And as Steve said, this now takes ARR to over GBP 2 billion for the first time. We've delivered cloud native ARR growth of 38% with particularly strong performance in Sage Intacct. And renewal rate by value was 101%, and that's up from 99% this time last year. This was due to good retention rates, strong customer add-ons and targeted price increases. And we also continue to make good progress in new customer acquisition. We've added GBP 180 million of ARR, up from the GBP 140 million in the previous year. So strength across these drivers means that we enter FY '23 with good momentum. So let's take some time now to look at the P&L. Total revenue growth doubled to over 6% for the year, driven by recurring revenue growth of 9% to GBP 1.8 billion. Organic operating profit increased by 8% to GBP 383 million, with margin expanding to 19.9%. Underlying operating profit grew by 2% to GBP 377 million, and that mainly reflects the impact of disposals made during the prior year. And together with the impact of the recent share buyback program, this has led to growth in underlying EPS of 8% to 25.7p. So reflecting strong business performance, we've increased the final dividend to 12.1p, that's up 4% and takes the full year dividend to 18.4p, also up 4%. So here's a more detailed view of our performance, starting with the revenue bridge. We have seen increasing demand for sage Business Cloud with recurring revenues up by 24% or almost GBP 250 million. Importantly, this growth was split roughly evenly between cloud native and cloud-connected solutions, driven by strong demand from both new and existing customers. This reflects the growing demand from SMBs for digital solutions. Migrations have also continued to drive growth, especially in cloud connected where the pace of product migration has not accelerated. As a result, revenue to be migrated decreased by GBP 73 million, in line with our strategy. The impact of all of this is an increase in Sage business cloud penetration, which is 75%, up from 67% last year. And this means that we have an increasing number of customers who are not able to connect services as part of Sage's digital network. So turning now to our revenue categories. Growth in recurring revenue of 9% was driven by 14% growth in software subscription, which reached GBP 1.4 billion. This has increased subscription penetration to 75%, up from 70% last year. And in line with our strategy, other recurring revenue and nonrecurring revenue continue to decline by 6% and 30%, respectively. This has taken recurring revenue up to 95% of our total, and this really reinforces the high quality and resilience of our business. Now let's take a look at the portfolio where we saw strong growth across all cloud solutions. The future Sage Business Cloud opportunity continues to perform well, with recurring revenue up by 11% and to GBP 1.7 billion, growth of 41% in cloud native to GBP 419 million is mainly driven by new customers and migrations. While growth of 17% in cloud connected to GBP 842 million was underpinned by a good performance in the international region and in North America. So as you can see, the pace of cloud growth is significantly ahead of the group as a whole. And as I mentioned earlier, Sage Business Cloud penetration is now at 75%. And in line with our strategy, recurring revenue in non-Sage Business Cloud declined by 8% to GBP 141 million. So moving on to our regional performance, which shows growth highlights in all of our regions. In North America, we delivered recurring revenue growth of 14%, mainly driven by the medium segment. For Sage Intacct, strong new customer acquisition, increased renewal rates and higher average contract values have all led to another very strong performance. And in addition, our Sage 50 and Sage 200 franchises have significantly contributed to growth in the region. And this means that Sage Business Cloud penetration has increased to 79%, up from 73% this time last year. In Northern Europe, recurring revenue grew by 7%. Growth in cloud native was primarily driven by new customer wins in Sage Accounting, Sage Intacct and Sage People, with cloud connected also increasing, driven by continued growth in Sage 50. And the result of this is Sage Business Cloud penetration of 90%, up from 86% this time last year. And then the international region, recurring revenue increased by 6%. Growth in France and Germany accelerated to 4% and 9%, respectively, driven by good performance across Sage Business Cloud. While growth in Iberia was 3%, and that's driven by cloud connected migrations. Africa and APAC. Growth here accelerated to 10%, with momentum building across Sage Accounting and Sage Payroll, in particular. And all of this was underpinned by significant growth in Sage Business Cloud penetration. NOI at 59%, up from 47% last year. Now as we said previously, we've been driving growth by investing in the business. Investment continues to increase in absolute terms, supporting Sage's ongoing growth. However, as we said previously, FY '21 was the inflection point. With top line momentum now building, the level of spend is now increasing at a slower rate than revenue. This efficient growth has resulted in margin expansion to around 20% for the year, and that's up from around 18.8% in the second half of last year. Investments in Sales and Marketing is now at 41% of recurring revenue and is helping to drive new customer acquisitions. And investment in R&D is at 16% and remains a key priority for the business. Our approach to investment and cost is highly disciplined with G&A now running at just below 10% of recurring revenue. Now let's look at the cash flow. Cash generation is a fundamental strength stage. And in FY '22, the group generated $402 million of cash from underlying operations, and this has resulted in continued strong cash conversion of 107%. Importantly, this is the fourth consecutive year that we've achieved cash conversion over 100%. And as a result, free cash flow is GBP 295 million, net of interest and tax. Our ability to generate cash has resulted in a strong balance sheet, including cash and available liquidity of GBP 1.3 billion. During FY '22, we completed several acquisitions, including BrightPearl, Futrli and Lockstep. We disposed Sage Switzerland and the payroll outsourcing business in South Africa, which completed the disposal program. And finally, we returned GBP 600 million to shareholders through share buybacks between March of last year and January of this year. And all of this means that our net debt leverage at 1.6x is now well within our midterm target range of 1x to 2x. And this gives us significant capacity to continue to support both organic and inorganic growth. And we retain the flexibility to move outside this range should business needs require. Finally, turning to the outlook for the group. We are entering the year with strong momentum, having made good strategic progress to accelerate growth. We, therefore, expect organic recurring revenue growth to be ahead of that reported in FY '22. We also expect other revenue to continue to decline in line with our strategy. And alongside this, we expect operating margins to increase in FY '23 and beyond, as we continue to focus on efficiently scaling the group. Thank you, and I'll now hand back to Steve.

Thanks, Jacqui. Now as I said earlier, our strong performance has been driven by consistent execution. Firstly, we've made strong progress transforming the group. By focusing on the needs of our customers, we've transitioned them to the cloud and to new cloud services at a pace and in a way that's right for them. Secondly, as we've done so, we've driven growth with demand from new and existing customers, helping to increase group ARR to over GBP 2 billion. Thirdly, we're investing more in innovation to support Sage's long-term success with annual R&D spend up by over 50% in the last 3 years to almost GBP 300 million in FY '22. And finally, this is resulting in high levels of growth across our cloud solutions with cloud-native ARR now over GBP 500 million. This has created a strong platform for sustainable growth. And having invested to create momentum, we now expect to grow more efficiently as we focus on scaling the group. And the way we're doing this is through our strategic framework for growth. This is the foundation of our decisions. It starts with our purpose to knock down barriers so that everyone can thrive. This guides how we serve our customers, how we act as colleagues and how we play our part in society. Our ambition is to be the trusted network for SMBs. And while our network may be digital, it creates human connections. And providing human customer service and community advice is key to our approach. We drive our ambition through 5 strategic priorities. These are the areas that have the greatest impact on our growth and on our stakeholders. And finally, we execute our strategy in accordance with our values. These are well understood at Sage and really do guide our day-to-day actions. Our success depends on our ability to deliver for our stakeholders. So let's take a look at each of them in turn, starting with our customers. We aim to deliver great technology with a human touch. From the North Tyneside Carers' Centre, to Johnny's Seeds in Maine, our customers say that the automation and deeper insights our solutions provide, make them more productive and more resilient. For colleagues, we're focused on a high-performance culture, but in an environment where all colleagues can thrive. We achieve this through development, inclusion and well-being as well as living and breathing our values. And I'm really proud that Sage continues to be recognized as a great place to work, receiving awards from organizations, including Glassdoor and Comparably. But knocking down barriers extends beyond customers and colleagues. Through our sustainability and society strategy, we support inclusive growth so that everyone can thrive. This year, through our partners, Kiva and The BOSS Network, we've enabled loans and grants for more than 13,000 entrepreneurs worldwide. We've helped develop STEM skills in almost 5,000 young people across the northeast of England. And in May, MSCI upgraded Sage's ESG rating to AAA, indicating that we are a leader in managing ESG risks and opportunities. And all of this comes together in the value that we create for shareholders. So let's turn to our customers and how we're meeting their needs. Together, with our network of accountants and partners, we serve millions of SMBs around the world. And this diverse customer base gives us great visibility into SMB trends globally. Now we are very mindful of the current macroeconomic environment and the challenges that SMBs face, particularly when it comes to high inflation. But what we've observed over many years is that SMBs tend to be agile. They're quick to adapt to adversity and to spot opportunity. Faced with an uncertain economic outlook, they tell us that investing in technology remains a priority. They want to simplify things, have better visibility and get paid faster. We provide solutions that enable them to do all of this, boosting productivity and efficiency. We also provide support and advice such as master classes on how to survive and thrive in today's economy, as part of Sage membership. And we show up for SMBs when it matters, championing their interest with policymakers and lobbying for initiatives that support investment. So despite the current economic environment, I'm optimistic and confident about our strategy, customer proposition and our opportunity for growth. From a technology perspective, the digital network is the way we will maximize this opportunity. Our ambition is to be the trusted network for SMBs. That means automating workflows, not only within organizations, but between organizations as well. Now as a chartered accountant, I'm passionate about this. I know firsthand how complex and manual some of these workflows can be. Through our digital network, Sage connects businesses with everyone that they need to connect to, including suppliers, banks, accountants, tax authorities and customers. We provide digital services, including those shown on the slide, to remove friction from these relationships. And we do that for all cloud customers, whether they're native or connected. And by applying AI and ML to the data that flows across the network, we create innovative services and solutions that add value by learning from our customers' behavior. Now the network and its component parts exist today, but the more we can scale the network, the more value that we can provide for our customers because a bigger network with more participants and more data is a more valuable network. And this is where Sage has a unique advantage over its competitors, our scale and access to data. So let me give you a few examples. We estimate over 10 billion invoices are sent and received by Sage customers annually. We have well over 20 million employees paid globally by Sage Payroll products. And in Sage Intacct alone, customers are transacting around $1 trillion of commerce per month. So more connections to the Sage Digital Network will enable us to deliver better services and more value to customers, leading to greater loyalty and higher lifetime values. So let's turn to our strategic priorities, starting with Sage Intacct, where our investment has delivered strong growth. We've developed our vertical presence, releasing new products into manufacturing, construction and real estate. And we acquired BrightPearl to help retailers manage their e-commerce operations. We've grown Sage Intacct internationally, including the launch of Sage Intacct manufacturing in France and the U.K. And we've launched Sage Intacct Starter Edition in the U.K., reducing upfront costs for customers and accelerating time to value. As a result, momentum continues to grow with ARR in the U.S. up by 1/3, whereas outside the U.S., it's more than doubled to GBP 18 million. And in fact, in FY '22, Sage Intacct added more ARR in a single year than it had in total when we acquired it in 2017, driven by another year of record new customer wins. At our recent customer conference, it was fantastic to hear ambitious SMBs evangelize about how Sage Intacct has helped them grow. So for example, Vitamin Angels, a public health organization, has unlocked funding and savings using Sage Intacct, enabling them to provide essential nutrition to an additional 800,000 people. Looking ahead, we'll continue to invest in the Sage Intacct platform. And we're excited to be launching Sage Intacct in Continental Europe, starting with France around the end of the year. Turning to our second strategic priority, where we're broadening the value proposition for midsized businesses. Here, we aim to deliver benefits to customers beyond core accounting by growing in adjacent areas. During the year, we launched an AI-driven service to automate accounts payable for Sage Intacct customers in the U.S., significantly reducing invoice processing costs and data entry errors. This same service is also live for Sage 50 customers in France. And this demonstrates how our digital network enables Sage to deploy a single service across both cloud native and cloud-connected solutions. We also launched Sage People Payroll, bringing integrated payroll functionality to Sage People in the U.S. and the U.K. And Sage Intacct planning has continued to grow rapidly. When we speak to CFOs, they tell us their remits are expanding all the time. Our objective is to deliver more solutions to address the broader challenges that CFOs face, driving stronger renewal rates and more value for customers. Our next priority is to build a scalable digital engine to acquire and serve small business customers. Here, we've invested in digital marketing to create a powerful e-commerce platform. And complementary to this is our proposition for accountants. We've built relationships with unserved accountants over many years. So we listened to what they said they needed, and we responded by creating Sage for Accountants, an innovative solution to help them manage and automate their business. It's already been adopted by over 2,000 practices across the U.K., just a year after launch. And we've enhanced it including through acquisitions, such as GoProposal, which enables accountants to price their services with greater insights and confidence; or Futrli, which provides their clients with enhanced cash flow forecasting. We've also built easy-to-use tax management capabilities into Sage Accounting and Sage for Accountants, ready for making tax digital. And beyond the U.K., we're also rolling out the small business approach in other markets, initially South Africa and Canada. Now scaling Sage's digital network creates a virtuous circle with more data, enabling better services to deliver richer experiences and the digital network is growing. First, Sage Business Cloud revenues are up 24% to GBP 1.3 billion. As Jacqui said, this has taken Sage Business Cloud penetration to 75%, so more of our customers are able to access the digital network. Secondly, we are expanding the availability of cloud solutions. We're doing this throughout the group, but particularly in Europe, for example, launching Sage Active in France, Sage Accounting in Spain and Sage HR in Germany. And third, we're launching new services that are powered by the digital network. Today, these include bank reconciliations, payment solutions, tax compliance and accounts payable automation. But they'll also include making APIs available to third-party developers as part of an open scalable ecosystem. In August, we acquired Lockstep, which brings accounts receivable capabilities as well as new connected accounting features, further scaling the network. Looking ahead, we expect that as we connect more solutions and develop new services, more and more participants will join the network. Our final priority, learn and disrupt, focuses on continuous innovation to underpin the long-term success of Sage. During the year, we entered into an expanded partnership with Microsoft, integrating teams with Sage Intacct and Sage People to simplify approval and collaboration workflows. And we're also making Sage Intacct and Sage Active available on Microsoft Azure as part of our multi-cloud access strategy. Our AI-driven outlier detection engine has so far attracted over 1,000 customers helping to increase the accuracy of general ledger transactions. And in October, we acquired Spherics, an innovative carbon accounting solution which helps customers on their journey to net zero. As we told delegates at COP 27 last week, SMBs will be critical to addressing the climate crisis, and they want to limit their impact, but they need support and tools to get there. So in conclusion, Sage had a very good FY '22. We made good progress on our strategic priorities, giving us increasing momentum as we enter FY '23. Our opportunity for further growth is significant, driven by our focus on innovation together with the need for SMBs to invest in technology in order to compete in today's digital economy. And we are executing well against this opportunity, winning new customers, accelerating growth and doing so more efficiently. I am very proud of the team at Sage and everything that we've achieved together this year. We're investing behind a clear long-term strategy. We're well positioned for the future, and we will scale the business by doing the right thing for all of our stakeholders. So that concludes today's presentation, and Jacqui and I would be happy to take your questions.

[Operator Instructions] First question comes from the line of Toby Ogg from JPMorgan.

Congrats on closing out a strong year. A couple of questions for me. So firstly, just wanted to start on the guidance for the organic recurring revenue growth to be ahead of last year. Clearly, you've got the renewal rate by value ticking up nicely there to 101% and your new customer acquisition looks strong, which is all helpful. But on the other side, you've clearly got the macroeconomic environment, which does seem like it's deteriorating when we sort of look at the broader software ecosystem. Could you just talk a little bit about kind of how you're thinking about that in the context of your guidance and sort of what you built in there in terms of that macro assumption? And then also just the pricing component of that growth? And then just for Steve, perhaps on Intacct. Clearly, you've made a lot of progress here with the internationalization across the English-speaking countries, and obviously now moving into the non-English speaking countries, and you've mentioned obviously, Sage Intacct in France launched coming up at the end of the year. Is there anything we should be thinking about here just with respect to the ability for Sage Intacct to be as successful as it has been in the U.S. and as we're seeing in the U.K. in some of these non-English-speaking countries?

Thanks so much, Toby. And why don't I -- I'll just give a quick kind of overview about the macro, and then I'll hand over to Jacqui and let her just sort of talk through some of the components of where we see the growth coming from. I think the first thing on macro is important just to look at the landscape across the different countries that we operate in. So 40% of the revenue comes from North America, although North America obviously has inflationary pressures, they don't have the same impact from the energy crisis. And I think you can see that optimism generally across North America is higher. Obviously, there have been a number of high-profile cuts from the big technology companies, but these are really companies that are more focused on both enterprise or consumer rather than small midsized businesses. And the trend that we see in the U.S. and indeed in all of our markets is that small, midsized businesses are under-invested in digital tools, and they are turning increasingly to investing in those digital tools in order to improve their own productivity and their own competitiveness. And in many ways, that is also exacerbated by the shortness of -- or the tight labor market, again, across all of the markets in which we operate, which is really incentivizing businesses to look more closely at how can they automate repetitive, more manual task. So all of these things are just driving across all of our markets and increased investment in digitization. Obviously, inflation is an issue for small, midsized businesses. But again, if you go back to North America, most commentators believe that, that inflation has probably peaked, and therefore, is manageable. But Jacqui, why don't you just talk about the specific sources of where we see the growth coming from?

Yes, absolutely. So thanks for the question, Toby. So we've seen ARR growth this year of 12%, and that's up from the 8% we reported last year. So a good step up. And that's very much being driven by the investments that we've been making over the past few years, and we're now starting to see the payback coming through in terms of an acceleration in both recurring revenue and in ARR. Now in terms of the individual components. As you mentioned, renewal rate by value that's at 101%, up from the 99% that we reported last year. And that's driven by a couple of different things. First of all, we have continued to retain low levels of churn. Alongside this, we have good strong sales to existing customers. And that's really been augmented by the enhancements that we have made to Sage's digital network, and that's increasing our ability to cross-sell and upsell. And then alongside this, we have targeted price increases. Steve mentioned at the first half, they were running at between 2.5% and 3%. And for the full year, they're at 4%. So that's really the core drivers, those 3 elements of the renewal rate by value of 101%. Alongside this, we've had a very good year in terms of new customer acquisition, GBP 180 million of new ARR coming from new customer acquisition, that's up from GBP 140 million in the prior year. So very pleased with that performance, and that gives us good momentum as we enter FY '23. And that alongside the trend towards digitization that we are seeing amongst SMBs helps us to sort of have the confidence that underpins the guidance that we have to be able to accelerate recurring revenue growth, but also importantly, to continue to expand the margin in FY '23 and beyond.

And then I think just quickly on Intacct. I mean the short answer is yes. We're very excited by the prospects for Sage Intacct outside the U.S. We have just under GBP 20 million of ARR already outside the U.S. But we think the prospects both in the U.K., but also across Continental Europe and South Africa long-term are very, very strong. I mean the impact on revenue in FY '23 from the introduction of Intacct into Europe will be negligible. But long-term, it will be a significant growth driver.

And your next question comes from the line of Will Wallis from Numis.

Congratulations on a strong year, particularly finishing strongly. Could I have sort of 2 parts. Firstly, just looking backwards and the ARR growth. Could you tell us -- talk us through the linearity of that through the -- through last year and in particular, what sort of quarter-on-quarter growth did you achieve in ARR in the fourth quarter? Are you able just to sort of split that out for us? And secondly, I just wanted to return to the question of price increases? And you said 4% for the year as a whole looking backwards. What should we be thinking about for FY '23?

Yes. If I can just take the piece on the ARR sequential growth. So as you can see from the strong 12% ARR exit rate, we've seen a good acceleration in ARR throughout the course of the year. At Q3, we reported that was at around 3.5%. At Q4 that ticked up to 4%, driven by the increased demand that we're seeing across SMBs. So that certainly leads us to the 12% ARR exit rate that we got.

And then I think maybe just a kind of wider comment around the pricing. So as we look forward into FY '23, we're very mindful that our customers are small, midsized businesses. So we have absolutely no intention of putting in -- putting it through inflationary -- headline inflationary type price increases. But we obviously -- 70% of our costs are people. And so we need to balance driving our own productivity, driving our own -- looking after our own increases in wage costs and balancing that with price increases. In FY '23, I think it's fair to assume that you may see a little more growth from price above the 4%, but it isn't going to be significantly more. It might tick up to maybe 4.5%, 5%, but it won't be any more than that.

And your next question comes from the line of Ben Castillo-Bernaus from BNP Paribas.

[indiscernible] for me. Firstly, just on the outlook. Obviously, it's quite open ended there. If I just look at your exit 12% ARR growth to accelerate through the year, that's usually a very useful leading indicator. I suppose my question is you've got stopping that recurring revenue growth in 2023 reaching something close to what your exit ARR growth was this year? And then my second question would be on new products with potential to make growth, that was down roughly GBP 70 million in 2022. Is that a reasonable cadence to assume for next year or can that accelerate? And what is the kind of multiplier effect there for each GBP 1 that does migrate to the Sage Business Cloud?

Okay. So I mean just on the outlook, obviously, we have to be mindful of the macroeconomic environment. I think, as I've said, I think the digitization by small midsized businesses will outweigh the macro. But I think what the message we're trying to give is we've spent the last 3 or 4 years making lots of changes. We've disposed of businesses. We've put Sage in much stronger shape. And we've had a very strong year in FY '22. And the message we want to give is that will continue. Now exactly where we end up, we don't have any better crystal ball than anyone else. But what we can see is that there are strong underlying trends, both with our existing customers and also in terms of acquiring new customers. And therefore, I think to have an outlook that says, look, we will continue this journey. We will continue to increase the rate of both revenue growth and also bringing back the margin, I think, is a sensible balanced outlook. And we'll obviously see, over the next few quarters, just how things play out, and then we can sort of give an updated view on how we see things at the half year. Jacqui, do you want to just talk about the to-be migrated products?

Yes, absolutely. So the non-Sage Business Cloud this year, that's declined by around 8%, and there's [indiscernible] products effectively with new path to Sage Business Cloud. And that's now less than 10% of the overall recurring revenue. Basically, that element of it is very much getting less and less material. In terms of the element of [indiscernible] is the to-be migrated portion of Sage Business Cloud. What you've seen this year in Sage Business Cloud overall, that's growing by 24%. We've added around GBP 250 million of revenue, and that's been flat roughly evenly between cloud native and cloud connected. The clock connected basically grew by about 17%, with growth coming from Sage 50 and Sage 200. But alongside that, what we are also now starting to see is product migrations coming through from that to-be migrated portion. And that's very much driven by the investments that we have been making and the connectivity of these products, connecting these non-cloud products into our digital network, and that's really driving some of the growth there that you're seeing in cloud connected. And moving forward, you can continue to see sort of some of that coming through, as we continue to invest in that connectivity.

I think an important point to make is in the early part of this journey. So for example, Sage 50 in the U.K. and the U.S., when we migrated customers from Sage 50 desktop to Sage 50 cloud connected, we achieved a premium because we were offering additional functionality to those customers. Typically now, if we migrate a customer and we're taking them just to a connected environment, i.e., they're staying on the same product, we are not achieving an uplift. So what we're doing is we're connecting them and then we're using that as an opportunity to offer them cloud services to get them to consume more. So it comes across in the cross-sell rather than the migration. As Jacqui said, what we also are seeing, though, is some migration from cloud connected products to the global products like Sage Intacct, like Sage Accounting. But the material movement, as you see that Sage Business Cloud penetration come up is we are connecting people to the cloud so that we can deliver them more cloud services. So you won't get the same uplift in revenue immediately, but what you're doing is creating a bigger opportunity to drive cross-sell and upsell in the future.

And your next question comes from the line of James Goodman from Barclays.

Mainly around the cost base and the margin outlook. So you talked with similar language about a margin expansion to last -- to what we said at this time last year. I think back then, you talked about 50 to 100 basis points being a sort of reasonable consensus expectation. I think fair to say you probably prioritize some of the growth opportunities a little bit over the higher end of the margin leverage this year. Is that the sort of same magnitude of margin outlook we should be thinking about last year or is this year's level more what you have in mind? And then related to that, can you talk a little bit about the headcount on an underlying basis and what that's done this year? I don't think we've got the data for that. And in the context of the cuts that you mentioned, Steve, elsewhere in the tech sector, wondering what Sage's headcount recruitment plans are for next year and how wage inflation that you also mentioned features in that?

Yes. I'll give a sort of overview and then Jacqui can kind of fill in the pieces. I think -- look, in terms of our cost structure, I think in some ways, we have a bit of an advantage over others in that we spent the last few years, really transforming and restructuring Sage. And so we come into this period in kind of quite strong shape. We did a job reduction a year ago. And as we look forward into next year, obviously, our expectations are that we will continue to grow strongly. And it's worth also just emphasizing that as the amount of other revenue, the SSRS revenue reduces, our total revenue growth and our recurring revenue growth start to get closer together. So we expect that we will continue to grow strongly, and we are -- with headcount, we are hiring cautiously, I think, is probably the way I would put it. So I don't envisage that we will need to do any significant headcount reductions because we've already done them. But I do think that we will continue to hire into places that are critical to drive the growth, but we are also very focused on our own productivity. And so I would not expect or we will not see headcount growing in line with revenue, it will grow quite a bit more close -- a bit slower. But Jacqui, maybe if you could just talk a little bit about the cost and the -- therefore, the impact on margin?

Yes, absolutely. So in terms of the margin guidance for next year, the key drivers of this expansion piece is really driven around the top line momentum, as Steve mentioned, that we are now seeing, and that's really been delivered through the investment that we've made over the past few years. We are going to continue to invest for growth in strategic areas to ensure that we sort of deliver the sustainable level of growth moving forward. But it will happen now at a slower rate than revenue, and that's really critical to enabling us to expand the margin. This will set alongside, as Steve mentioned, productivity and efficiency savings that we are going to generate, and that will really give us the confidence to expand the margin moving forward.

And your next question comes from Balajee Tirupati from Citi.

Balajee Tirupati from Citi. Congratulations on another period of strong results. Two questions from my side, if I may. First one, on growth acceleration in Northern Europe and momentum in the region in the Sage Accounting solution. Is this also being supported by making tax digital? And how much of a tailwind you're getting from gaining back share in the small business segment? And the second question is on cash flow and cash conversion. You have highlighted some impact from decreasing payables. Going forward, what is your view given the macro uncertainty and also increased rates which potentially makes working capital management important for your customers as well?

Right. Thanks. Yes, in Northern Europe, I think -- I would say that currently, the driver from making tax digital is relatively small because I think people are waiting to see what happens in terms of whether the government stick to the time scales in terms of taking it down to the smaller businesses, the -- its solutions. And so really, at the moment, the market is kind of operating in what I would consider to be kind of more business-as-usual. We've seen a lot of progress both in terms of our digital channel, but also our increasing doubling down in our relationship with accountants. We've introduced software called Sage for Accountants, which is for accountancy practices to help them run their businesses. We've seen over 2,000 accountancy practices sign up for Sage for Accountants. And so as we look forward over the next 12 months and beyond, we think we're very well positioned in that small segment. We have approved solutions if the government decides to go ahead with the next wave of making tax digital, and we believe we're well positioned to take advantage of that. Jacqui, do you want to talk about the cash?

Yes, absolutely. So in terms of the cash generation, this really does remain a core strength for us. We have cash conversion this year of 107% and GBP 1.3 billion of cash and available liquidity. And importantly, this is the fourth consecutive year that we have cash conversion above 100%, and that's driven by a combination of factors. Firstly, the growth in the subscription revenue, which has been very strong and also good working capital management. As you mentioned, we've had a slight reduction in the cash conversion this year, and that's really just driven by the timing of supplier and other payments at the year-end. We haven't seen any indicators of deterioration in the DSO. That remains very strong. And looking ahead, we would continue to expect the cash conversion will remain strong. Now in terms of sort of our customers, of course, cash flow is something that is going to become very, very important in these more challenging times. But I would just cast your mind back to the period during COVID, where we offered a number of payment holidays and different sort of mechanisms to our customers to support them, and we had very, very minimal uptick at that stage. And really one of the key drivers behind that, as Steve said in the presentation, these tools are mission critical to SMBs. They actually are helping them to be more resilient to manage their businesses to fend-off the potential sort of challenges of the recessions that they're facing. Therefore, sort of that gives us a bit of insulation and that gives us the confidence in our cash conversion moving forward.

And your next question comes from the line of Kai Korschelt from Canaccord.

I have 2, please. The first one, and I apologize, it's around the macro again. And I would like to sort of turn around slightly in a sense that is it fair to say that your current assumption around the macro outlook is that it's sort of more of a mild recession without a meaningful uptick in sort of SMB bankruptcies? Because I think that is probably one of the sort of concerns that will have some impact on churn and healthy recurring revenue growth and obviously being fully cognizant of the great starting point you have in terms of the exit ARR. I'm just wondering kind of what sort of scenario are you assuming right now for that recurring revenue growth guidance? And then the second question was really more around the M&A strategy. And I think you've -- it's fair to say that you've been building what is essentially an ERP stack for your SMBs, and that's been very successful in accelerating the growth. So my question is, have you considered something slightly more of peace and I'm thinking areas like [indiscernible] obviously, [indiscernible] in the U.S. or do you continue to plan to kind of really focus on the sort of core ERP-type applications for now?

Thanks. Yes. On the -- I think the first thing to say, I think, around the macro is our assumption is that there will be some increase in insolvencies that's inevitable during any recessionary period. But I think it's also relative. So if you take the U.K., as an example, there are over 6 million small, midsized businesses, bankruptcies are currently running in the thousands. And so what typically happens in a recession is that the total number of small, midsized businesses does not reduce. So you obviously get an increase in the insolvencies, but new business starts continue. I think the second thing is if you look at the balance of where Sage operates, 20%, 25% of our revenue is in the U.K., 40% of our revenue is in the U.S. Our assumption is that in the U.S., whilst there is inflationary pressures, that inflation has probably peaked and the U.S. does not have the same exposure to the energy crisis. So I think as we look across our markets, we expect to see a recession or headwinds that last for our financial year, so through to September, so for the whole of our financial year. But the flip side is we expect that the businesses that are operating and the total number of those will not reduce, we'll continue to invest in digital tools. And that's why we think as we look across all of our markets, in total, we can continue to make the progress -- same progress in '23 that we've made in '22, but it may not be even across all of our different markets. On M&A strategy, I think the succinct answer is, we continue to focus on the core of what we're doing. So you're likely to see us doing acquisitions which are additive to our network capability that allow us to solve pain points of small businesses and of CFOs and allow us to deliver more cloud services and more automation to them. You won't see us going off piece, you'll see us sticking very much to the core of our strategy.

And your next question comes from the line of Charles Brennan from Jefferies.

I'll just go with a couple of clarifications, if I can. Firstly, in terms of the top line, I think you've been very clear that the business is accelerating and that's going to drive recurring revenue growth. But are you in a position to say whether you expect ARR growth to accelerate as well? And then secondly, just in terms of the margin outlook, can I confirm that when you're talking about margin expansion, we're working off the 19.4% underlying margin? And then I know you talk about organic margin expansion. But if you do, do acquisitions this year, can you see any scenarios in which that 19.4% falls in the current year? And given that the organic 19.9% doesn't necessarily influence our forecasts going forward, do you think there's any scope for dropping that metric just to simplify the shape of the P&L for us?

Yes. So I'll let -- thanks, Charlie. I'll let Jacqui sort of go through the detailed questions. But let me just sort of make the overriding sort of commitment around margin. We're very much focused on the underlying margins going forward because we want to make it clear that when we do acquisitions, we will absorb -- if we do a loss-making acquisitions, we will absorb them. So the underlying margin will continue to show progress, but I'll let Jacqui just kind of fill in the blanks.

Yes, absolutely. Thanks, Charlie. So to be clear, the commitment as Steve said, on the expansion of the margin is on both the underlying basis and the organic basis. So you will see that expanding into next year. And I think on the piece on the ARR growth acceleration. Clearly, as you know, we don't guide to ARR, but what I can say is that like all the points that Steve has touched upon around the trends that we're seeing in the market, combined with the good momentum that we have entering this year, we are confident of our ability to accelerate recurring revenue growth. And clearly, as we work our way through the year, we will update on ARR as and when appropriate.

And so just in that context, the underlying margin declined in 2022. Is that because the acquisitions that you did during '22 were more margin dilutive than you would normally expect or is that just the tail end of investment that you were putting into '22 that you should be able to leverage going forward?

Charlie, if you look at the underlying margin year-on-year, if you remove the impact of the profitable disposals that we did, that margin is broadly flat year-on-year. So the acquisition side of things hasn't impacted it [indiscernible] absorbed that as we indicated we would. And moving forward, importantly, we will continue to absorb the dilution effect on an underlying basis.

Due to time, we will now take our last question. And the last question for today comes from Rahul Chopra from HSBC.

I have a couple of questions on renewal rates. Could you give us more color on renewal rates for cloud native and cloud connected solutions, particularly Sage Intacct? I just wanted to understand, is it mix driving renewal rate in addition to pricing, this is lower churn? My second question is on NC activities. Again, if you could give us more color on what's driving that? Is it competitive wins, are customers outgrowing their existing package?

[indiscernible]

Yes, yes. So in terms of the renewal rate by value, as you know, we don't spot out the renewal rate by value between the cloud native and the cloud connected portfolios, so that 101% is very much a blend across. But what I can say is that on the medium side of things, particularly within Sage Intacct, that renewal rate by value tends to be not that higher because it tends to be stickier because of the nature of all of the customers. So towards the one hand type area is what we've indicated previously. And that continues to be driven by a mixture of strong customer add-ons, and importantly, low levels of churn. So -- and we see that continuing as we move forward.

I'm sorry, could you just repeat the second question?

Yes. The second question is around new customer activity. What's driving that? Is it principally given the competitive wins or customers outgrowing the existing packages?

Yes. So it's a bit of a mixture in the medium segment, so really where we compete with Sage Intacct, yes, very much the customers are growing or they're migrating to a new package, which gives them more insight, more automation, et cetera. So when we -- a 100% of customers who move to Sage Intacct are moving from some previous financial or accounting package. In the case of small customers, where we're acquiring customers with Sage Accounting, the vast majority of those customers are coming to use accounting software for the first time. So they're coming from the spreadsheets or they're coming from an outsourced service that somebody has provided to them. So very much a different dynamic between the 2. And in the case of the kind of competitive dynamics in the medium segment, we're pretty much always competing against NetSuite. And in the small segment, we're pretty much always competing against Intuit and Xero.

I will now hand the call back to Steve Hare for closing remarks.

Thanks very much. And as always, everyone, thank you very much for taking the time to come to the results presentation, and thank you very much for your questions. And we look forward to updating you again when we announce our Q1 results in January. So thank you very much.