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

Good morning, everyone. Welcome to the Q3 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] Please be advised that today's conference is being recorded. I would now like to hand the conference over to Mr. Howell. Please go ahead.

Thank you, and good morning, everyone. Welcome to Sage's Q3 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 performed well in the first 9 months, delivering good levels of growth in line with our expectations. Total revenue for the group increased by 9% to over GBP 1.8 billion as we continue to scale the business in all regions. In North America, revenue grew by 11% to GBP 846 million, with a strong performance in Sage Intacct, together with continuing growth in Sage 200 and Sage 50. In the UKIA region, revenue grew by 9% to GBP 539 million. This was driven by strong progress in Sage Intacct, together with further success in Sage Accounting and Sage 50. And in Europe, revenue increased by 7% to GBP 477 million, with good growth across our cloud solutions, including Sage 200 and Sage X3. Turning now to the main performance drivers. Sage Business Cloud grew by 13% to over GBP 1.5 billion, reflecting good strategic progress as we further expand our global cloud solutions. This includes cloud native revenue, which grew by 23% to GBP 645 million and now represents more than 1/3 of the group. Recurring revenue increased by 10% to over GBP 1.8 billion, driven by continued momentum in ARR. This includes subscription revenue growth of 11%, resulting in subscription penetration of 83%, up from 82% last year. For Q3 stand-alone, total revenue increased by 9% to GBP 620 million, driven by continued growth across Sage Business Cloud. On an organic basis, total revenue for the first 9 months increased by 9% to over GBP 1.8 billion. So finishing on the outlook. With growth so far in line with our plan, we reiterate our full year guidance as set out at the half 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. So in summary, Sage has performed well throughout the first 9 months, in line with expectations. And we enter the final quarter with good momentum. Thank you. And now let's open for questions.

[Operator Instructions] First question comes from Adam Wood at Morgan Stanley.

It does look as if we've had a little uptick on the organic top line for you after a few quarters where we've had sort of very gentle deceleration. I wonder if you could talk about what that reflects in the environment? And any color you can give in particular areas where you're seeing improvement to drive that, please?

Yes. Thank you, Adam. So yes, we've seen a slight uptick, as you say, in the organic performance. Nonetheless, we've seen underlying revenue growth of 9% in Q3 year-to-date. That, as I said in the introduction, is very much in line with our expectations. We're seeing solid growth in North America with total revenue up 11%. That's very much in line with the first half. And as I said, we've seen a very strong performance from Sage Intacct with good support from Sage 200 and Sage 50. Across North America now, we're sustaining double-digit growth of an increasingly large base. UKIA, strong revenue performance, up 9%. Similarly, that was in line with the first half. We've got Sage Intacct in this region scaling rapidly now, particularly through NCO. And then in Europe, revenues up 7%, just slightly down on the first half, which was 8%, and that's good levels of growth across the whole Sage Business Cloud. And then in terms of the backdrop, during the first half, the macro environment for us was broadly stable. And as we said at the results call in May, it's since become a bit more volatile and uncertain. But despite that, we have seen no material changes in customer behavior at the Q3 mark. And so it's just worth reminding ourselves that Sage is a diverse business, both in terms of geography and product and is therefore has in-built resilience. We're in a structurally growing sector where SMBs are increasingly adopting digital tools, and we positioned the business well to continue to benefit from these trends. So I hope, Adam, that answers your question.

Next question comes from Toby Ogg of JPMorgan.

Perhaps you could just give us just an update on the ARR development in 3Q and just how the organic sequential looked in 3Q this year versus 3Q last year. And I also know just looking forward, there's a difficult comp on the ARR coming up in Q4, just given the strong Q4 last year. So just anything for us to think about here heading into Q4 as well on the ARR side.

Yes. So just to recap on the year so far in terms of sequential growth. In Q1, it was about 2%. In Q2, it's about 2.5%. And then in Q3, it was about 2% again. So we continue to have good momentum, and this underpins our confidence in our full year guidance, which we reiterated this morning. If you're looking at a comparison against the prior year, Q3 sequential growth in the prior year was a little above 2%. So this year's growth is just slightly below last year's level. But importantly, I think this is very much within the normal quarterly variation that we'd expect to see and certainly remains consistent, as I've said, with the guidance that we've reiterated. And then on Q4, yes, it's a stronger comp than we're running into. But given what I've just explained in terms of the momentum that we've seen during the course of the year, we're confident in the guidance that we're giving.

The next question comes from Kai Korschelt at Canaccord Genuity.

I have a question around Intacct, particularly in the U.S. So I appreciate you said there's no major change in buying behavior, but it looks like quite a few software companies more in sort of enterprise segments seem to have seen a bit of incremental hesitation in the second quarter, particularly with the sort of tariff uncertainty. Yes, if you have any color on whether you've seen anything similar that would be super helpful. The second question was just around Xero. They acquired a bill payments platform recently. I think Intuit has something similar. Just wondering if you think more strategically about your tech stack, do you think you have all the ingredients or with something like sort of payments or perhaps martech might be a bit more attractive. And I appreciate you've been buying sort of other functionality bits over the last 12, 18 months. Any color here would be appreciated. And then I have a follow-up.

Yes. So just in terms of the macro backdrop, I've just covered that in one of the previous questions. But just to provide a bit more detail, we delivered now organic total revenue growth of 9% to 10% over the last 3 years. And whilst we've been doing that, we've been improving the business mix. Cloud native revenue is now over 1/3 of total group revenue, and that is growing at over 20%. And then specifically on Intacct, in the U.S. now, we have ARR approaching GBP 500 million, and that's growing at over 20%. Internationally, in other words, ex U.S., we have ARR of more than GBP 60 million, and that's growing at over 50%. And we will continue to invest in these core products of ours and the platform, which again will give us momentum as we move into FY '26. And then lastly, in terms of M&A, as you know, M&A is a very important part of our strategy. It provides us with complementary technology and skills. And during the course of this year, we've completed 2 small bolt-on acquisitions. Last October, we bought ForceManager, which is the mobile sales force management tool. And then earlier this week, we've announced the acquisition of Fyle Technologies, which is an expense management platform for U.S. SMBs. So to answer your question, we're constantly looking for the appropriate technology, the appropriate skill sets, which we can then deploy against our significant international customer base. And that will remain a critical part of the strategy as we move forward. Thank you.