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

Good morning, everyone. Welcome to the Q3 Trading Update Call for The Sage Group. Your speakers today will be Stephen Hare, Chief Executive Officer; and Jacqui Cartin, Chief Financial Officer. [Operator Instructions] I would now like to hand the conference over to Ms. Cartin. Please go ahead.

Good morning, everyone, and thanks for joining us. I'll start by taking you through our performance in the first 9 months of the year. And after that, Steve and I will be happy to take your questions. Sage has delivered an excellent performance through focused execution, we've achieved broad-based acceleration across our key products and regions. This is underpinned by the investments that we're making in our platform and AI capabilities, which we continue to enhance the value we deliver to our customers. . Revenue increased by 11% to GBP2.1 billion in the first name, reflecting strong demand for our solutions for both new and existing customers. This is supported by the expansion of AI power features across the portfolio, including growth in Sage copilots and Agentic capabilities. Today, Sage's AI tills are available to over 600 clusters. That's up more than 20% since we reported our half year results in May. An adoption continues to grow. -- as customers increasingly rely on stage for critical finance, HR and payroll workers, we're getting it right is essential. Now moving to the regional view. In North America, revenue increased by 14% to GBP 932 million, with continued momentum and stage intact, supported by our vertical go-to-market approach. We also saw good growth in Sage 50 as well as in Sage 200, payroll and HR. In the UK, revenue grew by 10% to GBP 602 million. Sage Intac continues to scan rapidly alongside further strong growth in Sage 50. Our cleat small business suites, including Sage also performed well. while momentum and Embedded Services continues to build. And in Europe, revenue increased by 7% to GBP 528 million. This reflects strength in Sage X3 and Sage 200 broader portfolio growth and increasing traction from Sage intact. And underpinning all of this is the expansion of Sage Business close revenue, which grew at 15% to GBP 1.8 billion, driven by strength across both native and connected. Clinative was particularly strong, growing at 25% to GBP 794 million. Now moving to recurring revenue. This grew by 11% to GBP 2 billion, reflecting continued momentum in ARR and subscription revenue increased by 13% to over GBP 1.7 billion with subscription penetration reaching 8% and continuing to rise. For Q3, on a stand-alone basis, revenue was almost GBP 700 million with growth accelerating to 12%. And on an organic basis, revenue for the first 9 months was over GBP 2 billion, an increase of 10%. So turning to the IDEC, reflecting our performance in the year-to-date -- we reiterate our full year guidance a satellite at the half year. We expect organic revenue growth to be above 9% and operating margins to trend upwards in FY '26 and beyond as we continue to focus on efficiently gaining the growth. So to conflict, Sage has delivered an excellent performance in the first 9 months of the year with momentum building across the group. We're strengthening our products broadening our ecosystem and deepening the value that we create across our platform. By combining trusted technology, intelligent innovation and human expertise, we're helping customers run their businesses with greater productivity insight and confidence with further strengthening the quality, resilience and growth potential of Sage, underpinned by defined execution this gives us confidence in our ability to continue delivering sustainable, efficient growth over the long term. Thank you very much. Steve and I be delighted to take your questions.

[Operator Instructions] Our first question comes from the line of George Webb of Morgan Stanley.

Steve and Jacqui, congrats on the continued good results. A couple of questions, if I can. Firstly, just on the headline number, it looks like there was a sequential acceleration in the business in Q3 versus the first half stage. I think the organic revenues were closer to 11% in Q3 than 10% at the first half. Was that acceleration broad-based? Or could you add a bit more color around what drove that acceleration in Q3? And then the secondly, turning to AI. Could you add some color on what you're seeing in terms of customer engagement with Sage CoPilot and whether particular workflows are seeing especially strong usage. .

Thanks, George. So let me give you a little bit of color in terms of the acceleration drivers, and I'll give you a bit of a flavor also for the sequential piece that we're seeing from an ARR perspective. And Steve can touch upon sort of what we're seeing from an adoption and engagement perspective. So yes, overall, as I said in my opening remarks, we're very pleased with the performance. It's been a strong first name, underlying total revenue growth of 11%, which is very much in line with our expectations. This reflects much of the same trends that I touched upon in the first half. We entered FY '26 with strong momentum, and we have sustained that through the first 3 quarters. And we're now in the fourth consecutive quarter of acceleration that's been underpinned by strong growth across the growth, but in particular, I would call it both North America and the U.K. IA, which has sustained the double-digit growth that we reported at the first half. . And importantly, that has been underpinned by a couple of factors. First and foremost, we're seeing strong underlying demand coming across the growth, and that's being supported by high-quality defend execution from a go-to-market perspective and that is now increasingly being coupled with the growing impact of the monetization of AI features and functionality, which we are increasingly rolling across the group. Critically, though, we are seeing a good balance of growth coming through from both new and existing customers, which is very much indicative of what we're seeing in terms of trends of with new customers and our existing base coming to you often looking to host health and digitize workflows and make the most of AI in doing so. In terms of how that shows up from an ARR perspective, as you know, we don't report that in detail at this stage. But what I will say is, as you know, we reported 2.5% sequential growth in the first 2 quarters of the year, which is ahead of where we were last year. In Q3, we are slightly ahead of 2%, which again is an acceleration versus this time last year, and that's been underpinned by the factors that I said it. So that gives us good momentum as we enter the same quarter of the year and really underpins our conference both and the durability of the group moving forward, but also in the guidance that we've reiterated today. And Steve, do you want to pick up on the AI?

Yes. I mean, I think a few things on AI. I think first of all, I think the engagement from all customers base existing customers but also prospects. People are very focused on high curiosity, what can it do for me, making sure that they're making decisions which are sustainable over the long term. So obviously, things are changing very quickly. So particularly with each prospects. People are very focused on if I purchase something, is this going to still be relevant in 2 or 3 years' time. So AI, you can trust, trust within your workflows remains a very important point. In terms of the types of workflows, particularly in mid-market, accounts payable. So over half of new Sage Intacct customers are taking the AI-powered accounts payable module. And also, we've said this in the past, but a very small and mid-sized customers. very interested in anything which allows them to detect anomalies. So using AI to detect unusual transactions and surface things that therefore a human needs to look at. And I think the final thing I would say is, as you look forward to the future, particularly in the U.K. and Europe, there are some regulatory tailwinds in the U.K. making tax digital is really picking up for those smaller customers. And across Europe, we're seeing increasing traction around e-invoicing and all of these features are AI-powered.

We will now take our next question. Please stand by. Our next question comes from the line of Balajee Tirupati from Citi.

Congratulations from my side as well on another solid quarter. If I may. Firstly, could you share how you see dynamics in into fourth quarter and fiscal 2027. And I do appreciate base comp is tougher. But if I look at your 2026 outlook, would you say that with more than 9% revenue growth guidance, you're not ruling out 10% or higher growth this year? And then for a second question, if you could update on how the price contribution in your growth is shaping in 2026. And as your Sage accounting and Sage 50 customers, for whom copilot was rolled out earlier. As they come for renewal, are you seeing the desired uptick of copilot and uptick in pricing?

Thanks, Balajee. So if I just touch first on your question around the guidance piece, and I can give you a little bit of update on how we're seeing pricing and Steve can check out in terms of the customer behavior piece as well. So look, from a guidance perspective, as I said, we've seen a strong performance in the first 9 months, and that's in line with expectations, and we are entering the fourth quarter with a good level of momentum that's supported by a number of quarters of deceleration, and that's consistent with what we're seeing for the sequential growth perspective that I just said -- but as you referenced, as we head into the final quarter of the year, we do lap that tougher compare, which is reflective of that particularly strong Q4 '25 that we delivered at the back end of last year. And what that really does is it gives us a more balanced profile of growth for the full year, which is entirely consistent with what we said earlier on in the year. So consistent with what we were expecting. And that was reflected in the guidance that we're starting on today. But very importantly, we are investing behind the opportunities that we see in the market, both in terms of growth for Q4, but also in FY '27 and beyond. So we've got good levels of confidence there. And then in terms of the pricing trends, as you know, we don't give sort of the individual components of renewal by value at this stage of the year. But the trends that I said at the first half have really very much continued. We're seeing good balance growth across new end existing, and the renewal rates specifically continue to benefit from a combination of pricing and offtake and cross-sell upsell and really importantly, that continuation of the low and stable churn. In H1, we set a pricing contribution at around 5.5%, which was consistent with where we were in FY '25. And that really reflects the rollout of additional feature functionality and product innovation that we're delivering, including things like Sage Copilots and other AI capabilities. And as I said in the opening remarks, we now have over 600 volume customers. They have AI-enabled pictures includes and what I will say in terms of the customer behaviors like that, we're not seeing any increases in churn. We're very focused on the adoption piece, particularly with copilot. And then as Steve touched upon, we are increasingly noising growing attach rate stand-alone functionality makes the AP automation, tooling and particular with an NTAP and then also our agents that are being rules or gradually. So the #1 priority there is making sure that people adopt see the value and then that drives that increase over time. But why I will say, just to repeat, is we are seeing good uptake for seeing an offtake within cross-sell, sell and the churn rates are quite stable.

Yes, I think the only thing I would add is if you sort of ignore the -- ignore comparators for a minute because, obviously, the Q4 comparators are a bit tougher. I think when you sort of focus on the sequential growth. What I would say is that we have a lot of confidence both in Q4 and as we look forward into FY '27 that we will continue to make good quarter-on-quarter progress. And I think to answer the earlier question from George, I think in terms of the broad base of that growth, it's important that -- we're seeing good progress in the renewal rate by value. So we're seeing good progress in terms of how our existing customers are adopting the features and functionality. And we've always said that when we increase prices, we really want to make sure there's a fair value exchange and so we are delivering new functionality into that installed base. But we also continue both in the mid-market within Tacan and X3, but also in small, particularly with embedded services, we continue to acquire material numbers of new customers. And I think on Sage 50, obviously, a very important franchise, and we have seen strong growth from Sage 50. It's a combination of and making sure that we are able to deploy AI-enabled features into that installed base. But at the same time, offer those customers that want to take the path a fully cloud-native destination, whether that be migrating to a product like Sage Intacct or increasingly, in particularly in the U.K. and the U.S., we are offering a fully cloud-hosted experience for Sage 50 customers. So we're trying to make sure that customers are able to embrace the latest technology in the way that works for them.

We will now take our next question please standby. Our next question comes from the line of Mohammed Moawalla of Goldman Sachs.

Steve and Jacqui congrats on the performance as well. Two from my end. Firstly, given the revenue outperformance in Q3, how does that sort of change your thinking perhaps on the operating leverage and margin? So how should we think of kind of the pace of investment do you look to sort of still aim for that kind of 60 bps margin? Or could we see some outperformance, particularly for this year? And then secondly, just coming back to some of the product initiatives. I'm just curious. I know you've been pretty good at driving some pricing, but when you're thinking about sort of the intact opportunity, where are you in fundamental Europe in particular? Is that sort of still to come? And any other sort of initiatives we could think of as we move into 2027?

Thanks, Mo. I'll give you a bit of an update on margin, and Steve can give some color on the tax internationalization piece. So from a margin perspective, we now have a very consistent track record, as you know, of margin expansion, and we are in the fourth consecutive year of that expansion. And it is increasingly underpinned by a mixture of factors. So with the accelerating growth that we are 1 point or that's driving a good level of operating leverage. And that is sitting alongside an established pattern of operating efficiencies that we have now been building to over a number of years. But importantly, we know you are also starting to see the increasing benefits of the adoption of AI internally, which is sort of enhancing that sell. So all in all, that really gives us good capacity to invest for innovation and growth, as you see today, whilst continuing to expand margin. Now in terms of the trajectory moving forward, as I said out in my opening remarks we expect margins to continue to trend upwards in FY '26 and beyond. But we expect to be at the bottom end of that 50 to 100 basis points range as we look to continue to invest is to expand the margin. So we're making good progress. But clearly, we'll give you more fulsome update overall in November. And Steve, if you want to touch on the tax?