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

Good day, and thank you for standing by. Welcome to the Sage First Quarter Trading Update Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Jonathan Howell, Chief Financial Officer. Please go ahead.

Thank you very much and good morning, everyone. I'm pleased to share with you today our Q1 trading update. As usual, I'll briefly run through the key numbers and the performance of the business and after that, we can open for Q&A. Sage has made a strong start to the year, sustaining good momentum and performing in line with our expectations. Total revenue for the group was up by 10% to GBP 573 million, driven by continued growth in Sage Business Cloud. Regionally, North America grew total revenue by 13% to GBP 259 million, with a good performance in Sage Intacct, together with continuing growth in Sage 50cloud and Sage 200cloud. In the UKIA region, total revenue grew by 8% to GBP 162 million. This was driven by continued success in cloud native solutions, including Sage Intacct, Sage Accounting and Sage Payroll alongside growth in Sage 50cloud. And in Europe, total revenue increased by 7% to GBP 152 million with a strong performance, particularly in cloud connected solutions. Turning now to the main performance drivers. Sage Business Cloud revenue grew by 18% to GBP 454 million, enabling more customers to connect to Sage's digital network. Within this, cloud native revenue grew by 25% to GBP 174 million, reflecting continued success in new customer acquisitions. And in cloud connected, revenue growth was driven by both existing and new customers. Recurring revenue increased by 11% to GBP 554 million and now represents 97% of total revenue. This includes subscription revenue growth of 14% resulting in subscription penetration of 81%, up from 78% this time last year. Finishing on the outlook with first quarter growth in line with our plan, we reiterate our guidance for the full year. Therefore, we expect organic total revenue growth in FY '24 to be broadly in line with last year, and we expect operating margins to trend upwards in FY '24 and beyond. And so in summary, we've made a strong start to the year as we continue to execute on our strategy and focus on delivering efficient growth. Thank you. And now let's open for questions.

[Operator Instructions] And now we're going to take our first question. Just give us a moment. And the question comes from the line of Adam Wood from Morgan Stanley.

I guess, as always, the recurring revenue is the main driver for Sage and the ARR is a leading indicator of that. I know you don't give the kind of formal disclosure on the quarters, but could you just give us a feel maybe for the sequential build of ARR in Q1 and whether that was in line with your expectations and support of the full year outlook, please?

Yes. Look, thank you, Adam, for the question. Yes, as you say, we only formally report on ARR at the half year and the full year. But we exited FY '23 with strong ARR growth of 11%. Since then, in Q1, we've seen sequential growth of 2% and that's absolutely in line with Q1 of last year. And as we look forward, we can see opportunities to continue to grow the business through NCA and also through cross-sell and upsell as we move customers to the Sage Network. And so with that start to the year, which is very much in line with what we anticipated, you can see that we've reiterated full year guidance for FY '24. Thank you.

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

Maybe just to dig into the ARR development in a little bit more detail. Could you comment on what you're seeing through the retention versus NCA? I mean just thinking about some rising insolvencies in some of your markets. So you're not seeing any increase at all in SMB distress or any of your churn metrics? And the second question, if I can ask just on the regional performance in the quarter, fairly consistent with Q4, but we did see a little bit of a slowdown, I think, in the U.S., offset by a little bit of a pickup in the U.K. So I just wondered if there's anything to add there in terms of context.

Yes. Thanks, James. Good questions. Thank you. In terms of the renewal rate by value. So what's the return we're getting from our existing customer base? Again, we don't formally report on that, as you know, at the half year and the full year. But in FY '23, we exited with a renewal rate by value of 102%. And the key comments of that, churn, if you recall, remained low and stable. We were seeing strong sales to existing customers through cross-sell and upsell. And we put through price increases last year of about 4.5%. So broadly, I can confirm that those trends that you saw throughout last year have continued in Q1. And so that should give you some good comfort around the performance in terms of the renewal rate by value. In terms of the macro, yes, we discussed this before. Our customer base, SMB customer base has proved resilient. And as we've discussed before, I think a couple of drivers there. First of all, our products in Accounting, Payroll, HR, are mission-critical to these businesses. And I think also secondly, this propensity of SMBs to invest hard in digital to drive efficiencies in their back offices is still a strong dynamic. So we're very mindful of the macro backdrop. We look carefully, but at this stage, we've seen no material impact. And then on regional, just in terms of the backdrop there, first of all, overall, as you can see, in Q1, we've reported 10% total revenue growth, 11% recurring revenue growth. That is absolutely consistent with our plan for the year and also is very much in line with what you'd expect with the exit ARR rate at the end of last year. In North America, we saw total revenue growth of 13%, which is a good performance. We're pleased by that. It is slightly down in terms of growth rates on the full year FY '23. But don't forget that the full year FY '23 took the benefit of the impact of M&A in the underlying measure. And that really relates to Lockstep and BrightPearl, which we did in the second half of FY '22. In UKIA, good 8% total revenue growth, very much in line with what we saw last year. Last year was 9%. And then lastly, in Europe, we've seen a good acceleration there as we anticipated, and I think we discussed in the second half of last year. And we've accelerated from 5% total revenue growth for the full year last year in FY '23 to 7% in Q1. And that's really strong demand for our products across all Sage Business Cloud and also in particular in cloud connected. So all in all, a strong performance across the piece, which really supports the performance for the Q1 overall and also our expectations for the full year.

And the question comes from the line of Toby Ogg from JPMorgan.

Maybe just on Europe. I know you've already launched Sage Active in France, Spain and Germany, I think, in that region. Could you just give us a bit of a feel for how Sage Active has been trending? And then just on the gen AI development. I know we've been talking more about Sage's copilot, which you've already announced is in testing. What are the next kind of milestones we should be thinking about here with respect to Sage Copilot? Anything around time lines or sort of progression within the development function?

Toby, thanks for those questions. yes. And I think you've hit on a very important point here across Europe. We are now over the last 12 to 18 months, accelerated the pace of product launch and product release across Europe of our best cloud-native products. And so just to recap, in FY '23, we launched Sage Intacct in France, in exactly as you say in the question, Sage Active in France, Germany and Spain. And we've also expanded globally and in France some of our core products like Sage Intacct Manufacturing, Sage Intacct Planning, we've had new releases there, and Sage Payroll. As I said, I think, at Q3 and at the year-end, these are good products. They're making the start that we would expect, but it does take time to build scale and traction through the partner channel. So we have got in place now the right products for those geographic territories in Continental Europe, it is now going to take time for that to ramp. And that's exactly what we've seen in North America and UKIA in the past. And then gen AI, you've said this in your question, almost, Sage Copilot is our digital assistant. It's based on generative AI. It will provide smart analytics, which we believe will be a significant help to a Sage user. The product is currently in testing. And in due course, we will be making a full announcement about it.

And the next question comes from the line of Michael Briest from UBS.

Just sort of digging a little bit deeper on the trends on the customer base. If I sort of calculate on support and subscription, it feels like supports held up better, sort of minus 3% or so, subscription slowed a little bit, plus 14%. I'd sort of normally associate that with a more stable customer base. Should we say they're not migrating as much as they did this time last year? Is that a fair assumption that there's a bit more inertia from the client base? And then just a follow-up on headcount. I noticed it dropped 1% or 2% last year. What are your expectations for headcount through the course of '24.

Yes. Thank you, Michael. Good questions. Look, in terms of subscription revenue, and you can link that to Sage Business Cloud revenue as well. We're still seeing a very good performance. And it's very much in line with our plan. The important thing to remember, as you mentioned in the question, is that we are now getting to the end of the transition. Sage Business Cloud penetration is 87%. We've always said, once you get to around 90%, we think that will be the end state. If you go back over the last 4 years, we've had considerable increases in Sage Business Cloud and subscription revenue through migration. That has come almost full course. That transition is done. So when you're looking at these elements of the revenue stream, the growth going forward will be NCA and cross-sell and upsell to our existing customer bases. So very much in line with our expectations there. In terms of headcount, we are going to continue to scale the group efficiently. And so therefore, headcount will not increase in line with revenue improvements and revenue growth. At the moment, we have about 11,500 heads in broad terms. We don't expect that to materially change during the course of this financial year. Thank you, Michael. I hope that helps.

And the question comes from the line of Alex Nguyen from Jefferies.

I have 2 questions, please. So number one is around the UKIA. So our impression so far is that Xero has been relying on more price increase than you, at least for the past 12 months. Do you think this will continue to be the case this year? And would that, in combination with your improved offerings will help you achieve accelerating business momentum in the U.K.? And then question number two would be around the competitive landscape in Europe. Would you be able to make some comments about how you think of your competitor's offerings? Will the growth in Europe will be getting more of the white space or it's going to be replacing your competitors?

Sorry, Alex, I didn't quite catch the first question. Do you mind repeating it? It was a poor line, I'm sorry.

Yes. No worries. So I think Xero has been more aggressive than you in terms of relying on price increase. So do you think that will continue to be the case this year? And will that help you see some business acceleration in the U.K.?

Yes. Thank you. So you're talking about the U.K. and competitive performance of others in the U.K. market. Some of our competitors have put through quite substantial price increases. We kept ours across the piece, our total portfolio of products at around 4.5% last year. We thought that was the appropriate thing to do. We, in terms of differentials in price increases between competitors, that very rarely leads to a switch of SaaS provider by the end customer. What it does do, though, it blunts competitors opportunities to do cross-sell and upsell. And so customers only want to feel comfortable if they're asking for Payroll, HR, Payments, automated posting of invoices and receipts, that cross-sell and upsell activity is very important. And if you are proportionate and appropriate in your price increases, that encourages that type of behavior from your customer base. And then in terms of competitors across the U.K. and Continental Europe, we've seen no material change. It's the same competitors in the same product set. Our new products will be a combination of white space, as you say in your question, but also once you get to Sage Intacct and Sage Intacct Manufacturing, you will find businesses that are scaling up and therefore, require a deeper set of financial accounting capability. So in short, no material changes in the competitive landscape across the UKIA and Continental Europe.

Due to time, we are going to take our last question, and it comes from line of Deepshikha Agarwal from Goldman Sachs.

The first one is you like acquired Corecon last year, and then there is this small acquisition of Bridgetown Software in the beginning of this year. So can you just throw some light on what exactly is your strategy going forward when it comes to the fee in the space of construction software? And a second one would be just can you like help us with like how should we think about the shape of growth between the first half and second half as well as margins? Is there any like -- any factors to keep in mind like because other than that, it seems to be very broadly implied?

Yes. And thank you. We've -- as you say, we just completed a small acquisition in the construction, real estate sector in North America called Bridgetown. The -- we have a strong market share in North America in construction and real estate and are very prominent directly with the customer base and through the partner channel. What we are doing is investing in the product and technologies and capabilities that we need to continue the fast pace of version releases as we move that customer base to cloud connected and cloud native. And that's an important part of our North American strategy. And then in terms of guidance on full year versus half year. We only guide to the full year. As you can see, the performance in Q1 has given us confidence in the FY '24 outlook and we've reiterated that. And then in terms of margin, which you raised, at the beginning of the year on the earnings call, we said that we expected the margin improvement to be in the range of 50 to 100 basis points. And what we see now as we sit here today is analyst consensus is around 80 basis points improvement and we are content with that. And that's all on a constant currency basis. And similarly, we're content with the full year total revenue consensus as well.

And now I would like to hand the conference over to Jonathan Howell for any closing remarks.

Yes. Thank you, everybody, this morning for attending and also thank you for your very good questions. As is usual, James and his team will be available for the rest of the day and indeed going forward for any questions or any assistance that you may need. So thank you very much, indeed. Goodbye.

That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.