Good morning, everyone. Welcome to the Q1 Trading Update C all for The Sage Group. Your presenter today will be Jonathan Howell, Chief Financial Officer, who is joined by James Sandford, VP Investor Relations. After the speaker's presentation, there will be the 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, welcome to Sage's Q1 trading update. I'll briefly run through the key numbers and the performance of the business, after that, we can open for Q&A. Just to remind you that all the numbers in the trading statement are now reported on an underlying basis, unless otherwise stated. Onto the performance of the business. I'm pleased to say that Sage has made a strong start to the year, with performance in line with expectations. Recurring revenue was up by 12% to GBP 517 million. This was driven by strong growth in Sage Business Cloud of 31% to GBP 390 million, with continuing good levels of growth from both new and existing customers.
Subscription revenue increased by 18% to GBP 422 million, as a result, subscription penetration is now at 78%, up from 73% this time last year. Regionally, North America grew recurring revenue by 18% to $235 million, with continuing strength in Sage Intacct, together with a good performance in Cloud Connected. In the UKIA region, recurring revenue grew by 12% to GBP 151 million. This was driven by continued success in Cloud Native solutions, including Sage Intacct and Sage Accounting, supported by growth in Sage 50cloud. In Europe, recurring revenue grew by 3% to GBP 131 million, with growth across Sage Business Cloud, partly offset by the Swiss disposal in Q1 last year. Organic recurring revenue growth in Europe, which excludes the disposal, was 6%.
Looking now at the portfolio view, recurring revenue for the future Sage Business Cloud opportunity increased by 14% to GBP 479 million. Cloud Native revenue saw strong growth of 45% to GBP 141 million. This mainly reflects continuing good levels of new customer acquisition together with the impact of acquisitions in FY22. Cloud Connected has also continued to grow strongly, driven by existing and new customers, together with migrations to Sage Business Cloud. As a result, Sage Business Cloud penetration has increased to 81%, up from 71% last year, with more customers able to connect to Sage Network. Finally, recurring revenue in the non-Sage Business Cloud portfolio was unchanged at GBP 38 million. Just touching on other revenue, this decreased by 29% to GBP 23 million, in line with our strategy.
As a result, total revenue was GBP 540 million, which represents underlying growth of 10% and organic growth of 9%. Finishing on the outlook. With first quarter growth in line with plan, we reiterate our guidance for the full- year. Organic recurring revenue growth is expected to be ahead of that reported for FY 2022. Other revenue will continue to decline in line with strategy. We also expect operating margins to increase in FY 2023 and beyond. In summary, we've made a strong start to the year as we continue to execute on our strategy and focus on efficiently scaling the group. Thank you. Now let's open for questions.
Thank you. As a reminder, to ask a question, you will need to press star one one on your telephone keypad and wait for a name to be announced. Please stand by while we compile the Q&A roster. This will take a few moments. Now we're going to take our first question. Just give us a moment. The first question comes to the line of Adam Wood from Morgan Stanley. Your line is open. Please ask your question.
Hi. Good morning, Jonathan. Thanks for taking the question, congratulations on a good start to the year. Mine was just on the ARR side of the business. I wonder if you could just give us a little bit of help on how that's trended through the first quarter and maybe specifically whether you've been able to broadly sustain the growth that you saw in ARR in the fourth quarter, which was 12%, if memory serves. Thank you.
Adam, yes, thanks very much for the question. As you know, we only report ARR formally at the half- year and the full- year. We exited FY 2022, as you said, with strong ARR growth of around 12%. Since then, in Q1, we've seen sequential growth of just around 2%. That, therefore, is in line with the growth that we saw at Q1 last year. It's also very consistent with the plans that we had for the business at the beginning of the year. It also really underpins the full- year recurring revenue guidance that we've given, that we do expect organic recurring revenue growth to be ahead of that we reported in the full- year last year. That's the trends that we're seeing at the moment.
Clearly we'll update the market at the half- year and beyond, but it's a good start to the year.
Perfect. Thank you very much.
Thank you. Now we're going to take our next question. The question comes to line of James Goodman from Barclays. Your line is open. Please ask your question.
Yes. Morning. Thank you. Firstly, a follow-up, I suppose on the sequential ARR, Jonathan, thanks for that. 2% you said in the quarter, I think it was 3.5% sequentially or so in the fourth quarter last year. Is that just purely sort of quarterly volatility that's accounting for the slight slowdown there? I'm thinking that, you know, you should have some pricing tailwind. I think you said 4.5%-5% sort of annualized pricing tailwind for this year. Are you seeing some signs of macro impact in areas like the U.K. and in new customer acquisitions? If you could talk about some of the moving parts within that in a bit more detail, that would be very helpful. I've got a follow-up. Thank you.
Thanks, James. Look, first of all, in terms of ARR, we, you know, if you look at our ARR progression, we don't normally have any strong seasonality in the business. The only exception to that is sometimes towards the end of Q1, around the holiday period in December, there is a slight slowing of volume and transaction flow. Otherwise, I wouldn't read too much into some sort of particular seasonal trend in the numbers that you're seeing. In terms of pricing, good question. We talked, as you know, last year, on a few occasions about this. Across the portfolio last year, we put through about 4%-5% price increase in average where we thought it was appropriate and where we saw a fair value exchange with our customers for the services that we provide.
As we move into this year, our plan for this year is exactly the same, about 4%-5% across the whole portfolio. That's very, very consistent with what we did last year. Lastly, in terms of, you know, macro impact, we have not seen any impact on the business in Q1. You know, we are very mindful of, you know, the macroeconomic conditions out there across most of our territories, but so far we haven't seen that. I think it's just important to say that there is resilience in this business. We have a business that is 95% recurring revenue. We also, you know, have big geographical spread, and therefore, for instance, the U.S. provides 40% of our revenue and the macroeconomic conditions there are probably a little bit better than other parts of, say, Europe.
Lastly, we are providing a mission-critical service, and products and capabilities to our customer base. It enables them to run the business, it gives them resilience, it also drives digitization and efficiency. Notwithstanding the fact that we are mindful, of the macroeconomic environment, there is resilience, you know, in our core business. I hope that's helpful.
Yeah, very helpful. Thank you. I'll leave it there. Thanks. That was very comprehensive.
Thank you. Now we're going to take our next question. The question comes to line of Kathinka de Kuyper from UBS. Your line is open. Please ask your question.
Hi. Thank you very much for taking my question. Maybe just looking on the cost side of things, obviously you're putting through price increases of 4%-5%, but what are you experiencing yourself in terms of wage inflation? Are you still comfortable with our consensus sit at around 90 basis points of improvement versus 2022 for the full- year? Thank you.
Yes, just in terms of, you know, the cost impact, first of all, we have a global business, as you know, and therefore we have different economic impacts on different parts of our business, you know, at any given time. I think though to understand, you know, the inflationary impact, we have about 2/3 of our cost base is people and people-related costs. Therefore, you know, at the beginning of this year, we've set out a plan. We put through what we consider to be appropriate increases, you know, for our colleagues around the world. Therefore, we have good visibility and certainty about two-thirds of our cost base. There are inflationary impacts on other parts of our cost base, but in aggregate, they're not material.
Therefore my message is just, you know, we need to just focus on the, you know, the people and the people-related costs. We have good cost discipline, as you know. We have good visibility, as I've just described, on much of our cost base. And therefore, we are confident in the guidance that we've given that we will not only be able to accelerate growth during the year in recurring revenue, but we will also be able to deliver margin expansion during FY 2023 and beyond. In terms of, you know, what we've, you know, achieved last year, we increased the margin during the course of the year, we exited with a margin of around 20%. We anticipate that we can continue to extend that period of margin expansion. We are comfortable at the moment with where consensus is.
We think that is the right place to settle at this stage in the year. Thank you.
Thank you. Now we're going to take our next question. The next question comes through line of Balaji Tirupati from Citi. Your line is open. Please ask a question.
Thank you. Good morning, Jonathan, and thanks for taking my questions. Two, if I may. First, could you talk about the competitive dynamics, particularly in the small business segment? With the potential slowing of growth and extension of, Making Tax Digital timeline, do you see risk of increased competitive intensity on price increases? Then I have a follow-up as well.
Yes. Look, in terms of the competitive dynamic across our portfolio, it's very much unchanged. We haven't seen, you know, a change in the competitive environment, nor particularly in the products that are being released, nor indeed in, you know, our core territories and core products in terms of pricing. I think the growth that we are achieving is as a result of the investment programs that we've had over the last 2- 3 years. As you know, that investment has gone into sales and marketing with a significant increase in the marketing spend over the last 2 - 3 years, and also in products. I think bringing those two together, driving greater focus and efficiency on fewer Cloud Native products in our core territories is what's driving this growth.
A very good question on Making Tax Digital. Thank you. If you recall back in FY 2019, the first phase of Making Tax Digital was in relation to larger companies and did have a material impact on our results in FY 2019 in the U.K., and therefore impacting also the overall group results. In terms of our planning for the second phase of Making Tax Digital, we were, you know, very cognizant of the fact it related to smaller companies and would be spread over a more extended period of time. Therefore, in our planning for this year and thereafter, it was going to have a really a non-material impact in terms of the growth rates that we want to achieve in the U.K.
Therefore, although it's disappointing for our customers that Making Tax Digital 2 has effectively been deferred, you know, many of our customers want to digitize their tax, you know, submissions and want to make that a more efficient, seamless process. In terms of the impact upon us as an organization at Sage, it's there's no material impact. Thank you. I hope that was helpful.
This is helpful. If I may ask a follow-up question?
Yes.
Could you talk a bit about Intacct outside of the U.S. and also plans around Sage Accounting expansion?
Yes. Sage, you know, as you know, the bedrock of the Sage Intacct portfolio and customer base is the U.S. where it originated. Two years or so ago, we introduced Intacct into the U.K. and South Africa. Those numbers back then two years ago were obviously non-material, and it was early days. The pickup has been very good. The partner channel in the U.K. have really taken hold of this product. They like it. They are identifying customers for whom it's giving real benefits. We're seeing good acceleration in the U.K. and also South Africa, in Sage Intacct. The other thing about Sage Intacct, you know, to bear in mind is we've launched Sage Intacct right at the end of last year in France.
We've got Sage Intacct Manufacturing now in France as well. We've got Sage Active in France. Those are all our state-of-the-art best Cloud Native products, which are going into continental Europe for the first time. That again, gives us confidence about the longevity of the growth that we can achieve in the Cloud Native portfolio. Thank you.
Thanks a lot.
Thank you. Now we're going to take our next question. The next question comes to line of Kai Korschelt from Canaccord Genuity. Your line is open. Please ask your question.
Yeah, good morning. Thanks for letting me ask a question. I just had a quick one on the difference in growth rates between the U.S. and Europe. Obviously double digits in the U.S. and I think Intuit's QuickBooks also grew more than 20% in the U.S. as well. I'm just wondering typically, you know, the America, you know, the U.S. are sort of ahead on digital transformation. By definition, would that imply that at some stage you would expect a similar acceleration in Europe? Or do you think it's more of a sort of reflection of the economic growth at the moment? I'm just wondering kind of, you know, your thoughts on that. Thank you.
Yes. I think there are two things that drive, you know, the as far as we're concerned, the standout growth that we're seeing in North America, part of it is the product set that we've got. And, you know, where we have Sage Intacct now growing at over 30% in North America, that really drives, you know, an expansion of the go-to market, the expansion of the marketing spend and really engages the channel. That is a core underpin of the growth trajectory that we're seeing in North America. So it's good new customer acquisition and very good renewal rate by value.
Up around 108%, 110% in some instances in that product base. The other reason is that the move to, you know, the move to cloud-enabled digitized services for accounting, payroll, back office capabilities, has always been advanced in the U.S. And that has just accelerated and built, you know, as a geography, over the last 2-3 years, and certainly during lockdown, and you can see that in the results of other major U.S. software competitors. In Europe, to your question, you know, as you can see on an underlying basis, it grew at 3%. On an organic basis, it grew at 6%. We're in a slightly different position.
As I've just mentioned, we are now rolling out these Cloud Native products, really for the first time in continental Europe over the 2-3 years. That will take a little bit of time for that momentum to grow. Also, there needs to be a readiness and an awareness and a willingness to adopt these new products, you know, in part from the customer base, but also, you know, to make sure that our partner, you know, our partner channel is also fully engaged. There is a little bit of a, you know, there is a bit of a time lag there that one would expect. Thank you.
Thank you. Sorry. Could I just by definition then, is there essentially an internal expectation without issuing any guidance that perhaps at some point over the next two years, growth in Europe could accelerate in a sort of similar fashion than it has in North America just because of that sort of slight lag in cloud adoption?
Yeah. The, you know, as you, as you said, we're not here to be sort of issuing guidance by geography over a 3-year period. I think, you know, we have now got a very broad product set. We've got Sage 50, Sage 200 Cloud Connected across a lot of that base. We're supplementing that just as we've done with, these Cloud Native products. That is exactly the story of development of Sage. First of all, in North America, which as you say, is growing at 18%. Then secondly, a few years behind came the U.K., and you can see that that's growing at 12%.
You know, we are hopeful that this broadened customer proposition that we have and dedicated marketing spend will, you know, will sort of improve performance across continental Europe. I hope that helps.
Yes, absolutely. Thank you very much.
Thank you. Now we're going to take our next question. Please stand by. The next question comes to line of Frederic Boulan from Bank of America. Your line is open. Please ask your question.
Hi, good morning, Jonathan. If we can follow up on the product area. If you can give us an update on the roadmap for 2023 in terms of major launches we should expect in particular in Europe to complement the current offerings. On the U.S., any update on the marketing requirements you need to push Intacct further and to push the brand awareness of Sage versus competition? Thank you.
Just, in terms of, you know, product roadmap, the, you know, the real push that we've had in, in major product development were those ones that I've mentioned, in Continental Europe, really to fill a very important gap in our product suite. That has been the main development. I think other things that I would point to that are sort of coming on stream and helping us during the course of this year are the acquisitions that we did last year. Brightpearl, Futrli, and Lockstep. They were done in Q2, Q3, and Q4, respectively. Embedding those, getting the capabilities and functionality of those products in front of our very, very broad customer base, particularly in North America and U.K., is a real priority.
That's the sort of the product focus at the moment, and clearly we'll update you on any major launches. In terms of North America, you know, the important thing to understand is, you know, we are now, you know, we have now shifted, you know, very significant spend to marketing over the last 2-3 years. You know, we have now over 40% of recurring revenue is the marketing spend, the sales and marketing spend is about 40% of recurring revenue. That's a high level of spend, which we want to continue to do. I don't think, you know, in that segment, in the medium segment, that we lack brand visibility or product knowledge.
You know, we have one or two, you know, important competitors there. We're very, very comfortable with our win rate, that we achieve in that market.
Okay. Thank you very much. Thank you. Due to time, now we would like to take our last question. The last question comes to line of Charles Brennan from Jefferies. Your line is open. Please ask your question.
Hi. Good morning, Jonathan. Thanks for for squeezing me in. I think I asked you something similar last quarter, but I'll try again. In the background, it feels like we've seen an ongoing level of press coverage, referring to you becoming more proactive, in shifting customers to subscription. Ultimately, that's obviously a good thing, but can you just comment on whether you've seen any uptick in customer resistance? Or have you seen any change in churn rates as people are shifting from an on-premise solution to a subscription solution? Thank you.
Yes, Charles. Thanks very much. A good question. Thank you. The... You know, there has been some press comment, as you, as you mentioned. The... This relates to a very small number of Sage 50 customers in the U.K. We... It relates to those customers that still are on an on-premise license arrangement. We have had a 5-year migration program now for Sage 50 customers to move to either Sage 50 Cloud Connected or indeed Cloud Native if they, if they so wish. At this stage now, we're now moving all customers into those environments, principally because the version that is being used really doesn't offer the full product capability, reliability and resilience, and indeed data security that we would expect, you know, of a, of a, you know, Sage customer.
That's, you know, what you're referencing. It's the last element of this 5-year migration. Obviously we're doing it, you know, carefully, and ensuring that all customers have an opportunity to understand what we're doing and how it would benefit them. As I say, you know, we're just getting to this end stage now after a 5-year migration of Sage 50 in the U.K. I hope that helps. Thank you.
Are you able to size it for us in terms of how many customers, how many Sage 50 customers you've got left in this, in this bucket? I assume after five years it's a substantial minority, but are you able to size it for us?
In terms of our customer base and in terms of revenue, it's an immaterial number.
Okay. Thanks. That's helpful.
Thank you. Dear participants, thank you for all your questions today. I would now like to hand the conference over to Mr. Howell for closing remarks.
Yes, thank you very much indeed for finding the time to dial in. Thanks for your good questions. Your interest is always appreciated. Obviously, if you do have any follow-up questions or require any further information, James and his team will be on standby for today and indeed the rest of the week. Please, please do call if you have any further questions, and I hope that was helpful, and thank you for your time.
That does conclude our conference for today. Thank you for participating. You may now all disconnect. Have a nice day.