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

Good morning, everyone. Welcome to the Q1 Trading Update Call for The Sage Group. Your presenter today will be Jonathan Howell, Chief Financial Officer; who is joined by James Sandford, Head of Investor Relations. [Operator Instructions] I would now like to turn the conference over to Mr. Howell. Please go ahead.

Thank you very much, and good morning, everyone, and welcome to Sage's Q1 trading update. I'll briefly run through the key numbers and the performance of the business. And after that, we can open for Q&A. Sage has made a strong start to the year, delivering revenue growth in line with our expectations. Total revenue for the group increased by 10% to GBP 612 million driven by broad-based growth across all regions. In North America, revenue grew by 11% to GBP 279 million with a good performance in Sage Intacct, together with continuing growth in Sage 200 and Sage 50. In the UKIA region, revenue grew by 9% to GBP 176 million. This was driven by strong progress in Sage Intacct, together with further success in Sage Accounting, Sage Payroll and Sage 50. And in Europe, revenue increased by 8% to GBP 157 million with a strong performance across our accounting, HR and payroll solutions. Turning now to the main performance drivers. Sage Business Cloud revenue grew by 13% to just over GBP 500 million, reflecting good strategic progress as we further expand our global cloud solutions. Within this, cloud-native revenue grew by 22% to GBP 208 million. And importantly, growth remained well balanced between new and existing customers. Recurring revenue increased by 10% to GBP 595 million driven by continued momentum in ARR. This includes subscription revenue growth of 12%, resulting in subscription penetration of 83%. On an organic basis, total revenue increased by 9% to GBP 611 million. And finishing on the outlook, with first quarter growth in line with our plan, we reiterate our guidance for the full year. Organic total revenue growth is expected to be 9% or above, and we expect operating margins to trend upwards in FY '25 and beyond. And so in summary, Sage has made a strong start to the year as we continue to execute on our strategy and focus on delivering sustainable, efficient growth. Thank you. And now let's open for questions.

[Operator Instructions] We are now going to proceed with our first question, and the questions come from the line of Adam Wood from Morgan Stanley.

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

Adam, thank you. Look, first of all, you can see from the announcement, this has been a strong quarter for Sage. We delivered underlying revenue growth of 10%. That's up against full year FY '24 of 9% and is very much in line with our full plan for the year. We've seen good growth in North America. Total revenue is up by 11%. That's just slightly down on the 12% that we saw in full year FY '24. But it was a good performance from Sage Intacct off an increasingly larger base and also good continued growth across the portfolio in Sage 200 and Sage 50. North America, don't forget, is our largest region. It remains robust, and it's our fastest-growing business. UKIA, that was a very strong performance as well. That's up by 9% in Q1 against 8% in FY '24, particularly strong growth in Sage Intacct. What we saw in the second half of last year has continued into Q1, particularly through NCA. And we also had good success in our cloud solutions for the small business portfolio, supported also by Sage 200 and Sage 50. And in Europe, revenue is up by 8% compared to 6% for the full year in FY '24. And that comes from a strong performance across our full portfolio of products, accounting, HR and payroll solutions. So all in all, I'd say it's a good start to the year. It gives us good momentum as we enter Q2, and it supports our guidance for the full year. And then I think secondly, Adam, in terms of macro, we haven't seen a material change from the second half of last year. As you know, the SMBs, they continue to navigate this uncertain macroeconomic environment, but conditions are stable, and we haven't seen a deterioration. And as I often say on these calls, our solutions save our customers time. The digitization of back offices drives efficiency and enables our business owners to focus on growing their business. And then lastly, in terms of the competitive environment, we see no material change there either. Thank you.

We are now going to proceed with our next question, and the questions come from the line of Toby Ogg from JPMorgan.

Perhaps you could just touch on the sequential ARR evolution in Q1. I know you had a strong Q4 sequential rate of growth. So it would be good to hear how the sequentials have evolved in Q1. And then just anything you could call out as well in terms of seasonality-wise to consider here going forward.

Yes, thank you. Thank you very much indeed, Toby. First of all, in terms of sequential ARR, as we all know, we only formally report ARR at the half year and full year, but we did exit FY '24 with strong ARR growth of 11%. At Q1, we've seen sequential growth of around 2%, and that's broadly in line with Q1 FY '24. So it's a strong start to the period. It's in line with our plan, and it very much underpins the revenue guidance that we've given. Seasonality, there's not too much seasonality in our business. But noticeably towards the end of the Q1 period, around the holiday season, we do see at times a slight softening in demand and sales execution. Thank you.

We are now going to proceed with our next question, and the questions come from the line of Frederic Boulan from Bank of America.

Jonathan, if I can ask you around your AI pipeline. I mean you've kind of talked about the traction you've seen on the -- on all the pilots you've done. If you can expand a little bit on the pricing strategy, traction you expect and any kind of impact on your growth. I mean when do you think that's going to be a material driver for the business? And then, I mean, you commented on competition. I mean no material change there. Can you maybe double-click a bit on what Intuit is doing, especially in the U.S. with their 14 SMBs? I mean that potentially is a large pool of customers that's going to be -- that Intuit is trying to keep as they graduate, as you call it. So can you discuss a little bit if you felt a bit less inflow of customers from that source of growth?

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

We are now going to proceed with our next question, and the questions come from the line of Charles Brennan from Jefferies.

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

Charlie, thank you. You're right. So in short, the Q1 headwinds from currency, from FX was about 3%. Q2, though, that will turn into -- as we sit here today at the end of January, that will turn into a small tailwind. And obviously, we'll keep you posted as we go through the year quarter-by-quarter. Look, you touched on guidance for the half year and full year. When we guide to the full year, we've entered FY '25 with good momentum. Q1 was a strong performance, as you can see, in line with our plan. We are confident in our full year guidance. It's based on the deal closure rate that we've got at the moment and also on the pipeline. And that leads us, as we sit here today, to be very comfortable with consensus with total revenue growth currently sitting at 9.2%. But as I said, we will update you during the course of the year. Thank you.

We are now going to proceed with our next question, and the questions come from the line of Balajee Tirupati from Citi.

Two from my side, if I may. Firstly, could you comment on potential impact from the U.K. mandating the report of benefits in kind via payroll software? Are you expecting this to support Sage Payroll momentum in the region? And second question is a follow-up on North America. Could you share any incremental color on how the client purchase behavior has evolved since the U.S. election and if you are seeing any changes in pipeline build there?

In terms of the second question, is there any change in the macro in the U.K. since the election, we -- as I said right upfront, we operate across sort of a suite of sort of major European and North American economies. If you take them as a whole, we haven't seen a material change from the second half of last year. You asked around the U.K., we have not seen an impact yet. And don't forget, though, that the pipeline for a Sage Intacct sale, which is a significant driver of growth now in the U.K., is about 3 months. And so we much rather look at sort of sales performance, lead generation on a quarter-by-quarter basis, which gives us a much more reliable underlying trend. And then in terms of mandating of digitization of reporting by governments, whether in the U.K. or elsewhere, we -- that is an underlying secular trend across all of our major territories. Each incremental change that governments make clearly is a tailwind to us. We will, from time to time, call out where there is a significant or material opportunity that will drive accelerated growth. This is not one of those. It is part of the secular trend of digitization, not only of our customers' back offices, but the way they interface with government, tax authorities and other regulatory models. Thank you. Thank you, Balajee.

Actually, the first question was more around U.S. election. So are you seeing any changes in the States after elections in November?

Not yet in terms of execution of opportunities through the sales pipeline or sales completion. But I do say, Sage Intacct, it is a 3-month sales cycle effectively.

In the interest of time, we are now going to proceed with one last question, and the questions come from the line of Michael Briest from UBS.

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

Michael, thanks very much. The -- in terms of headcount, you're absolutely right. During the course of FY '24, we saw a reduction of about 5%, down to 11,000 total headcount as we exited last year. Those savings were made across the piece. We -- first of all, we focused on very careful, measured hiring plans to ensure that we are allocating the resource in exactly the right areas of business. And then secondly, a careful, continuous refinement of the shape of the P&L that we want between various functions and regions. So no sort of standout, big redundancy programs or big pivots in our headcount, but a very clear focus on the number and quality of the hiring that we were doing. In terms of going forward, we've now had 2 years with the headcount flat and decreased by 5%. We're growing the business at around 10%. So we do anticipate that the headcount will begin to move up during the course of FY '25. But I can reassure you that, that headcount increase, and the total cost of employment for us is about 70% of our total cost base, I can assure you that, that will increase at a significantly slower rate than total revenue. And then in terms of Sage Active, very -- early signs are promising. It's -- as you know, all of our new cloud products in new territories, it takes 2 or 3 years before traction really builds. So it's not material at this stage. The customer base is beginning to become familiar with it. Our sales teams are working with it. But it's just like Sage Intacct in the U.K. where, if you recall, the first 2 or 3 years, it was a slow pickup, a careful pickup. And then once you get past the 2- to 3-year mark, there is accelerated growth. And we called out the numbers for Sage Intacct in the U.K. at the end of last year, and that's a very significant pickup that we saw. So we'll keep you updated, but nothing material to report at this stage. Thank you, Michael.

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

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

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