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

Good morning, everyone. Welcome to the Q1 Trading Update Call for The Sage Group. Your speakers today will be Steve Hare, Chief Executive Officer; and Jacqui Cartin, Chief Financial Officer. [Operator Instructions] I would now like to hand the conference over to Mr. Hare. Please go ahead.

Thank you very much, and good morning to everyone. And as always, thank you for joining us. I'm really pleased to be joined this morning by Jacqui Cartin, who is our new CFO, as you know, started on the 1st of January and without further ado, I'm going to hand over to Jacqui, who's going to talk us through the Q1 performance, and then we'll open up for some questions. So over to you, Jacqui.

Thanks, Steve. Good morning, everyone. So I'm pleased to say that Sage has made a strong start to the year, with growth strengthening across our key regions. As a result, total revenue for the group increased by 10% and to GBP 674 million. In North America, revenue grew by 13% to GBP 304 million. That was driven by a strong performance from Sage Intacct and was supported by continued growth in Sage 200 and Sage 50. In the UKIA region, revenue increased by 10% to GBP 194 million. This reflects further rapid scaling Stage Intacct and strong growth in Sage Accounting and Sage Testing. And in Europe, Revenue increased by 7% to GBP 176 million, with good levels of growth across our pointing, HR and our Payroll Solutions. I'll turn now to performance drivers. Sage Business Cloud revenue grew by 15% to GBP 574 million. This reflects good strategic progress and continued investments in our Cloud and AI acquired solutions. Within this, Cloud-native revenue grew by 24% to GBP 253 million, supported by continued strength in new customer acquisition. In [indiscernible] also delivered good line of growth, driven by both existing and new customers. Recurring revenue, that increased by 10% to GBP 655 million, reflects continued momentum in ARR. This includes subscription revenue growth of 12%, which takes subscription penetration to 84%. And on an organic basis, total revenue for the group increased to GBP 673 million, with growth accelerating to 10%. And finally, turning to the outlook. Underpinned by a strong first quarter, 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 continue to trend upwards in FY '26 and beyond. So to conclude, Sage has made a strong start to the year. We're executing our strategy. We are continuing to innovate across our platform. And in turn, this is driving an efficient, sustainable growth for our stakeholders. Thank you very much. Steve and I will move be delighted to take questions.

[Operator Instructions] And the questions come from the line of Adam Wood from Morgan Stanley.

If I could just first of all, could you give us a little bit more color. We've obviously seen acceleration in the business both in the fourth quarter and again in this quarter? Maybe just give us a little bit more insight into what's changing in the product level to give us that acceleration. And I'd be particularly interested in impact in the U.K. on getting anything you can help us with on scale and growth for that because that obviously seems to be impacting the business nicely now. And then secondly, you talked about continued momentum in the ARR. We obviously saw acceleration there in the fourth quarter with a reasonable read of that comment that we've seen a further acceleration in ARR in the first quarter, please?

Thanks for the question, Adam. So I'll just touch upon first the overall acceleration piece and then I'll pick up on the ARR piece. So yes, it's been a good first quarter. We're very pleased with the performance. And importantly, it's very much in line with our plans at this stage of the year. If I can give you a little bit more color regionally, in North America, total revenue, as I said, is up 13%, and that's in comparison to 12% in FY '25. Underpinning that was a strong performance in Sage Intacct with good growth across new and existing customers. And that has been supported by strong demand and high quality sales execution in the North American business. And as we referenced at the year-end, we're now really starting to see the investments that we have been making in our go-to-market strategy, our vertical strategy and our people in the North American business really starting to pay off, and that is helping drive the acceleration that you're seeing here today. And alongside that, as we said in the announcement, we've seen continued momentum in Sage 50 and Sage 200. So good broad-based growth in the North American business, driving that acceleration. And then if we touch upon the UKIA region, total revenue, that was up by 10% versus 9% in FY '25. And I should point to that as being supported by rapid scaling of Sage Intacct, which is now really starting to pick up traction. And in particular, we've seen strength in the NCA motion in the first quarter of the year, which is really starting to support that. And we'll give you a bit more color around the growth in that in -- at the first half, but the good performance there. But I would also call out in the UKIA region, the strength that we've seen in Sage Accounting and Sage 50 in particular, where we've seen really good levels of cross-sell and upsell, which have contributed to that acceleration that you've seen overall in UKIA alongside the Intacct strengths that we referenced. And then finally, in Europe, solid growth there of 7%, broadly consistent with where we were in FY '25 and in line with our plans for this stage of the year. We've seen broad-based growth there, but with particular success in Sage 200 and Sage X3 in this territory, and I would call it a good performance, in particular from Iberia. So all in all, it's been a good start to the year. We've got good momentum as we enter the second quarter, and that very much supports the guidance that we set out for the full year '26. And then if I touch upon how that sort of links through the ARR performance. As you know, we don't formally report ARR at the first quarter. But as you've seen in Q4 of last year, we exited with strong momentum, and that has very much carried through into the first quarter in the ways that I've just touched upon. So sequential growth for Q1 was around 2.5%, and that's ahead of where we were this time last year at around 2%. So a good start to the year gives us positive momentum. And as I say, really underpins the confidence that we have in the guidance that we've set out, but clearly, we'll give you and a more fulsome update at H1.

And the questions come from the line of Toby Ogg from JPMorgan.

Steve and Jacqui, maybe just on the organic recurring revenue growth. So we've seen that accelerate now for 2 quarters in a row. Any particular reasons to think that trend wouldn't continue? And then how much would you put this down to actual AI monetization driving incremental revenue upside versus that underlying momentum you're seeing in Intacct across the U.S. and the U.K. versus what you're then seeing across the Cloud-connected portfolio?

Thanks, Toby. So if I can give you a little bit of color as to how we're thinking about the guidance and the forward momentum in the business, and Steve can touch a little bit upon the AI monetization strategy. So as I touched upon, and you can see, we've entered the year with really good momentum, and that's carried into Q1. And we have seen strong demand and high quality sales execution across the business as a whole, which is promising. And that really sets us up well for the remainder of FY '26. Now as you know, as we head into the second half of the year, we do start to lap slightly tougher comparators. And so the guidance of 9% or above that we set out today really reflects a balanced view of these factors. The Q1 very much sets us up well to deliver that guidance and gives us good confidence, and we've got strong momentum as we exit. Steve, do you want to give a bit of color on the monetization?

Yes. I mean I think the way to think about it, Toby, is it's very early days. I would say that most of the momentum that you're seeing in the last couple of quarters comes just from the underlying performance of the business. We have got some early monetization because we rolled out Sage CoPilot bundling that into some of the plans which we then use to put an uplift through in terms of the price of those plans. But we haven't really started yet in terms of any monetization, for example, of individual agents that we're starting to launch. So very much early days. I think you should read this as strength in the underlying performance of the business.

And Toby, if I can just add, if we don't give the individual components of ARR at this stage of the year, but as a reminder, in FY '25, the contribution from pricing was around 5.5%. And and that was supported in particular by the rollout of AI and CoPilot in the U.K. business. So as we continue to roll out more features and functionality and enhancements through AI capabilities, we deliver more values. And in some instances, we will take price in that way. And in the first quarter of the year, we have also rolled out CoPilot and the intelligent finance agent in the U.S. and U.K. Intacct businesses in the first quarter. And that sits alongside the strong cross-sell and upsell that I referenced as well as really good levels of NCA. So those combined set of factors sets us up well for the rest of FY '26 and underpin the strength of that guidance.

And the questions come from the line of Michael Briest from UBS.

Just in terms of the benefit you talked in Q4 from moving to multiyear deals with Intacct in the U.S. Could you maybe give some sense of how that affected growth in Q1? And your expectations for the year? And then I appreciate the comments on rolling out AI further into the portfolio. What percentage would you say of your revenue base has now been upgraded to sort of AI enhanced? And what's the time line for sort of completing the full sort of rollout?