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. After the speaker's presentation, there will be a question-and-answer session. To ask a question, you will need to press star one and one. I would now like to hand the conference over to Mr. Howell. Please go ahead.
Thank you very much. Good morning, everyone, and 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 nine months, sustaining good momentum and delivering revenue growth in line with expectations. Total revenue for the group increased by 9% to over GBP 1.7 billion, driven by continued growth in demand for our software and services. Regionally, North America revenue grew by 12% to GBP 786 million, with a good performance in Sage Intacct, together with continuing growth in Sage 50cloud and Sage 200cloud. In the UKIA region, revenue grew by 8% to GBP 497 million. This was driven by strong progress in cloud-native solutions, including Sage Intacct, Sage Accounting, and Sage Payroll, alongside growth in Sage 50cloud.
And in Europe, revenue increased by 6% to GBP 454 million, with a strong performance, particularly in Sage 200cloud, HR, and Payroll. Turning now to the main performance drivers, Sage Business Cloud revenue grew by 16% to almost GBP 1.4 billion, with growth remaining well-balanced between new and existing customers. Cloud-native revenue grew by 23% to GBP 539 million, reflecting continued success in new customer acquisition. And in cloud-connected, revenue growth was driven by both existing and new customers. Recurring revenue increased by 10% to almost GBP 1.7 billion, representing 97% of total revenue. This includes subscription revenue growth of 13%, resulting in subscription penetration of 82%, up from 79% this time last year. For Q3 standalone, total revenue increased by 9% to GBP 584 million, driven by continued growth across Sage Business Cloud.
Finishing on the outlook, with growth in the first nine months 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 broadly in line with H1, and we expect operating margins to trend upwards in FY 2024 and beyond. In summary, Sage has performed well throughout the first nine months, in line with expectations. We enter the final quarter with good momentum as we continue to focus on transforming the workflows of small and mid-sized businesses to deliver sustainable, efficient growth. Thank you, and now let's open for questions.
Thank you. If you wish to ask a question, you will need to press star one and one on your telephone and wait for your name to be announced. To withdraw your question, please press star one and one again. We will take our first question. Your first question comes from the line of Adam Wood from Morgan Stanley. Please go ahead. Your line is open.
Hi, good morning. Thanks for taking the question. Maybe just first of all, if we could dig in a little bit into the regions. I guess we're at different phases in each of the countries in terms of the adoption of cloud, the products that you have that are relevant for cloud, and so that will lead to different demand drivers. Could you just give us a little bit of an update in terms of what you see as the demand drivers from the client side and how your products are meeting that in each of the countries? And if I could fit in a cheeky follow-up, maybe just if we look at the guidance for the full year, we obviously had a slowdown in the recurring growth in the third quarter versus the second quarter.
On the math that we've done, as long as nothing unusual happens to the other revenue, we'd have to have pretty much stable recurring revenue growth in the fourth quarter. Is that roughly the idea of the guidance to suggest that recurring shouldn't get materially worse from here this year, or have we gone wrong on the math somewhere there? Thank you very much.
Adam, thanks for the question. Look, first of all, just standing back, looking at the results, it's 9% total revenue growth for the nine-month period, 10% recurring revenue growth. When we look at the regions, our largest and fastest-growing region in North America grew at 12%, with a good level of customer demand and strong sales across the whole of the Sage Business Cloud. At the first half, we did call out, though, the CFOs were taking slightly longer to make investment decisions, and that has led to a slight moderation in growth that we've seen during the course of Q3. It's very much in line with our expectations and in line with what we said at the first half stage. The longer-term trends, though, towards digitization and the enablement of cloud products to drive SMB efficiency still remains as strong as ever across North America.
U.K. and Europe, they both grew at 8% and 6%, respectively. That's in line with the performance that they had at the half-year, and we're seeing continued strong demand for all of our cloud-native products across both of those regions. Sage Intacct in the U.K. was the standout. We now have over 1,000 customers in the U.K. on Sage Intacct. Across continental Europe, we have strong optimism there, really as a result of the low levels of cloud adoption and digitization in the SMB business community. On top of that, we now have, for the first time, Sage Intacct in place and being adopted by customers in both France and Germany. In terms of guidance, we've reiterated the full-year guidance. You can see that we're saying that organic total revenue growth will be broadly in line with the first half.
We're comfortable with consensus revenue growth, which is currently at about 9.3%, and we continue to see good levels of growth underpinned by the strong investment that we're making in the business, which gives us the expectations that we can drive revenue in Q4 and beyond. And then just, I think, just in conclusion, if we look at our pipeline now and the momentum that we've got into Q4, to get right to the heart of your question, we're confident in the full-year outlook that we've given today.
Thanks for your help. Thank you.
Thank you. We will take our next question. Your next question comes from the line of Frederic Boulan from Bank of America. Please go ahead. Your line is open.
Hi, thank you very much. Just a follow-up on a previous question, first of all, around the moving part into the full year. So if I look at this, the number you just mentioned of 9.3%, that does suggest on our math improvement of revenue growth in Q4. So can you confirm that and what's going to drive that improvement? And in particular, any comments you can share with us around Sage Business Cloud, where we saw around 18% growth in H1, deceleration to around 14% in Q3. So what's your kind of expectation there in terms of short-term return dynamics? Thank you.
Yes. Frederic, thanks very much for those questions. In terms of understanding the trajectory as we go into Q4, if I just give some color on ARR growth during the year, as you know, we don't formally report on ARR at the Q3 stage. We only do that at the half-year and the full year. But if we look back across the year, Q1, sequential ARR growth was 2%. That was in line with last year. Q2, sequential ARR growth was 2.5% compared to 3% last year. And in Q3, the sequential revenue growth that we've seen in ARR this quarter is slightly below what we reported last year, which was 2.5% to the nearest decimal. So we're seeing a robust level of growth.
It's giving us momentum into Q4, and that really sort of underpins the guidance that we've given for total revenue to be broadly in line with the first half. Sage Business Cloud, good question. It grew at 16%. That's absolutely in line with our expectations. It was a moderation on the half-year growth rate. But don't forget, cloud-native revenue is now a 1/3 of our total revenue and is growing at 23%. And within cloud-native, we've got some significant drivers of growth: Sage Intacct, which is growing at above 23%, Sage Accounting, and Sage Payroll. So what we're seeing is still good absolute levels of growth, but off a much larger base. And therefore, as a percentage, the growth rate has moderated.
Just building out on that, Cloud Connected, which is obviously a component, an important component of Sage Business Cloud, we are now reaching the end of the transition there. I think I said this at the half-year stage. Sage Business Cloud penetration is now at 90%. So therefore, as we look forward, the Sage Business Cloud growth rate is going to increasingly converge on the group total revenue growth rate. That's what we're beginning to see. In straightforward, the big building blocks of this business model, as we look forward, the growth in this business is going to be driven by NCA and cross-sell and upsell and not migrations. So that informs the slowing trajectory of Sage Business Cloud. Thank you.
Thank you.
Thank you. We will take our next question. Your next question comes from the line of Rahul Chopra from HSBC. Please go ahead. Your line is open.
Hello. I have a couple of questions. The first question is around, as you said, you flagged in H1 24, CFOs taking longer decision times. Could you just give a bit more color in terms of what are you seeing sequentially in terms of the timelines? Is it still around the same levels? And then we can touch upon in terms of ARR trends, more sequentially what you're seeing in terms of NC activity and renewal rate. That's the first question.
The second question is around, could you give more detail around NC activities? Basically, in terms of one of the reasons for NC activities, you have launched new products within Sage Intacct, like for example, construction, manufacturing, versus the traditional Sage Intacct products. So could you just give a bit more color in terms of what's driving that NC activity, new products versus existing core products as such? Thank you.
Yes. So I think there are three parts there, if I take them one by one. Macro, I think it's very similar to what we said at the first half stage. We said, and I've repeated today, that we saw signs at the half-year stage of CFOs in North America taking slightly longer to make the investment decision. That very much remains the case, but the conditions are stable. We haven't seen a deterioration since the half-year stage. And then in the sort of the competitive environment, there are no material changes there. It remains a fragmented market. There's considerable opportunity now for us at Sage. We have, for the first time, best-in-class cloud-native products in all of our major regions: North America, UKIA, and continental Europe. Renewal rate, you asked about that. We only formally report on that at the half-year and the full year, as you know.
I can give you a bit of color. If you recall, at the half-year stage, we reported a renewal rate by value of 102%. The critical components of that were churn, which remained low and stable at that stage. Secondly, cross-sell and upsell were strong, was very much in line with our expectations. And then, if you recall, we said that price increases across the portfolio and across geographies averaged out at 5%. We have seen no material change in that, and the performance has been broadly in line with that in Q3. And then in terms of different sort of Intacct products, Intacct has now been released in Germany, as I say, and that's an important step. Intacct covers France and Germany and U.K, and the U.K. performance has been very impressive. Off a smaller base, it's outgrowing in terms of rate North America.
The U.S., the demand is still broad and strong, but we have seen in percentage terms a slight slowing in growth. The U.K., as I say, we have over 1,000 customers there now from a standing start of nothing just over two years or so ago. And we're in early days in France and Germany, but we are optimistic. The strength remains in the existing verticals. So not-for-profit, professional services, and other services companies, and healthcare in North America is still performing strongly. And we're making good progress in the newer verticals. Construction is growing well off our established on-premise base, and that's been accelerated by Sage Intacct for Construction and Sage for Construction suites. And we've also made good progress for SDMO. We now have products in place across North America, U.K., and continental Europe.
Don't forget, that is in our deepest and broadest vertical where there is a lot of opportunity. Thank you. Next question, please.
Your next question comes from the line of Sven Merkt from Barclays. Please go ahead. Your line is open.
Hey, good morning. Thank you for taking my question. Just one maybe. The 2.5% sequential ARR growth you had in Q3, can we extrapolate that for Q4? And is it right, and this would suggest that ARR growth for the full year would decelerate to below double digit? Thank you.
Just to repeat, thank you, Sven. The Q3, as I said, the sequential growth rate that we saw in Q3 was slightly below last year's level of 2.5%. In terms of sort of forward-looking guidance, we've given our guidance on our two GAAP metrics, which is total revenue growth on an organic basis and also margin. Beyond that, at this stage, we're not providing anything more. Clearly, we'll give you a full update at the year-end.
Perfect. Thank you.
Thank you.
Thank you. We will take our next question. Your next question comes from the line of Toby Ogg from JP Morgan. Please go ahead. Your line is open.
Yes. Hi, morning, and thanks for the question. Just on the CFOs taking a little bit longer to make those investment decisions, what would you say have been the reasons why they're taking longer to make those decisions? And then just quick follow-up on the pricing. You mentioned similar performance in line in Q3 to the 5% in the first half. What are the drivers that we should think about for building confidence around the sustainability of that rate of pricing? Thank you.
Yes. If I just take the pricing first, over the last three years, we've put through pricing increases of about 4.5%-5% in broad terms. We've done that for three consecutive years. We've done that on a sustainable basis, product by product, across all of our major territories to ensure really that there is a fair value exchange between us and our customers. And that's a very deliberate strategy that we've taken over the last three years and believe that it's sustainable. I think the other component of thinking about margin is we are comfortable that those pricing increases that we've put through give us sufficient headroom above any salary increases that we've put through in the last two to three years. Our salary and compensation element of cost is just over 2/3 of our total cost base.
And so this pricing increase alongside the pay increases of 4% or so that we've put through in recent years covers that. And then in terms of the situation in North America, it's very hard to put one particular reason or two particular reasons why we're saying this slight delay in decision-making. The requirement for our products, the efficiency gains that can be achieved through both the cloud-native and digitization of payables and receivables provide deep efficiencies, and therefore, the demand and the interest is very much there. It's just a slightly slower conversion rate that we've seen. And I think the last thing to say is that we now have the right product set across all of our global geographies.
So I think probably for the first time in a good number of years, we do believe we're in a position to see compensating growth coming from other regions around the world. Thank you.
Thank you.
Thank you. We will take our next question. Your next question comes from the line of Alex Nguyen from Jefferies. Please go ahead. Your line is open.
Good morning. Thank you for taking my question. Can I just follow up on the growth for the cloud-native suite? So please correct me if I'm wrong, but I think in 3Q, the growth rendered here did slow down a little bit from 25% in the first half to around 20%-21% in third quarter. You mentioned that the offerings are still competitive, and there has been no change in terms of customer decision-making taking longer. It's not getting worse. So how should we reconcile all of this with the growth deceleration? Has there been more competitive pressures that you guys are seeing, or am I reading too much into it?
Yes. Look, thanks very much for the question. It's, I think, very much as I said in an earlier question. We've seen 23% growth in the cloud-native portfolio. That's been driven by Sage Intacct in North America, which is the largest element of that revenue stream. Cloud-native products in the UKIA have performed strongly, being Sage Intacct, which is growing faster, albeit off a smaller base than North America, Sage Accounting, which is growing at a good rate in the U.K., and Sage Payroll. The absolute levels of ARR builds and acquisition are strong and are an increase on the previous year. It's just coming off a significantly larger base as it now accounts for a third of total group revenue, which is leading to this slight decline in the rate of growth.
As I said earlier, the Sage Business Cloud growth of 13%, of which cloud-native is a critical component, will over time converge on the total revenue growth rate of the group. That's exactly what we're seeing and is very much in line with our expectations. Thank you.
Thank you. That's all the time we have for questions. I would like to hand back to Mr. Howell for closing remarks.
As ever, thank you very much indeed for your time and your questions. James and the team will be available for the rest of today and the rest of the week for any follow-up questions that you may have. Thank you very much indeed.
This concludes today's conference call. Thank you for participating. You may now disconnect.