Hello, and welcome to the Sage Q3 Trading Update conference call. Your presenter today will be Jonathan Howell, Chief Financial Officer, who is joined by James Sandford, Head of Investor Relations. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star one one on your telephone keypad to join the queue. To withdraw your question, please press star one one again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker today, Jonathan Howell. Please go ahead.
Thank you very much, good morning, everyone. As usual, I'll briefly run through the key numbers and the performance of the business, and after that, we can open for Q&A. As a reminder, all numbers in the trading statement are reported on an underlying basis unless otherwise stated. Sage has delivered a strong performance throughout the first nine months, in line with expectations, growing both recurring and total revenue by double digits. We increased recurring revenue by 12% to over GBP 1.5 billion. This was driven by continued strong growth in Sage Business Cloud of 29% to GBP 1.2 billion, with growth well-balanced between new and existing customers. Subscription revenue increased by 17% to nearly GBP 1.3 billion, resulting in subscription penetration of 79%, up from 74% this time last year.
Regionally, North America increased recurring revenue by 16% to GBP 702 million, driven by strength in Sage Intacct, together with a good performance across the Sage 200 and Sage 50cloud franchises. In the UKIA region, recurring revenue grew by 11% to GBP 456 million. This was driven by continued progress in cloud native, including Sage Intacct and Sage's small business solutions, alongside growth in Sage 50cloud. In Europe, recurring revenue grew by 7% to GBP 404 million, with good growth across Sage Business Cloud, including Sage 200cloud and Sage HR. This growth was partly offset by the Swiss disposal in Q1 of last year. Looking at the portfolio view, recurring revenue for the future Sage Business Cloud opportunity increased by 13% to over GBP 1.4 billion.
Cloud native revenue grew by 36% to GBP 436 million. This 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 83%, up from 73% last year, with more customers able to connect to the Sage Network. Finally, recurring revenue in the non-Sage Business Cloud portfolio increased by 3% to GBP 113 million. Moving on to the Q3 standalone, recurring revenue increased by 11% to GBP 523 million, against a strengthening comparator, driven by continued growth across Sage Business Cloud.
Total revenue for the first nine months grew by 10% to GBP 1.6 billion. For Q3, total revenue also grew by 10% to GBP 543 million. Other revenue continued to decline in line with our strategy. 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 first half. Organic recurring revenue growth is expected to be in the region of 11%. Other revenue will continue to decline in line with strategy. We expect operating margins to trend upwards in FY23 and beyond. In summary, Sage has delivered a strong performance throughout the first nine months in line with expectations. We enter the final quarter with strong momentum as we continue to focus on delivering sustainable, efficient growth.
Thank you. Now let's open for questions.
Thank you. As a reminder, to ask a question, please press star one one on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we prepare your first question. The first question comes from Adam Wood at Morgan Stanley. Adam, your line is open. Please go ahead.
Hi, good morning, Jonathan. Thanks for taking the question. I just wanted to clarify, I mean, obviously on the recurring side, we've seen a very slight slowdown in the third quarter, and the unchanged guide for the full year means we probably expect to see another very slight slowdown in the fourth quarter. You've obviously flagged that you've got tougher comparisons on the second half. I just wanted to get a confirmation that it is just still those tough base comps or slightly tougher base comps that's driving that, and there's no kind of underlying change in the macro or the market that you're seeing, that you're signaling with that, please. Thank you.
Thank you, Adam. Yes, I think first of all, just to say, we performed really in line with our expectations across all of the regions. You know, as you said, you know, we've seen 12% recurring revenue growth reported at the first half. We've seen 12% recurring revenue growth reported Q3 year to date, and 11% Q3 standalone. That profile is in line with our expectations. It's driven by the stronger comparators that we're facing, particularly in North America and UKIA, as we move into Q3 and Q4, as revenue ramped up significantly this time last year. The other thing that's just worth calling out as well, is net total revenue growth now is at 10%.
That was the same at the half year at the nine-month stage, but also on Q3 standalone, and that's an important milestone for us. In terms of the macro, we still have seen no material impact of the macroeconomic backdrop, and that's driven by probably a couple of things. First of all, we provide mission-critical services and functionality to our SME customers, which enables them to run their business, you know, as they move forward. Secondly, and most importantly, is that the digitization of accounting software, payroll software, HR software, other back office services, is moving apace in our customer base. It drives deep efficiencies and resilience, and that is a secular trend that we're seeing, you know, coming through in these numbers, and we anticipate we'll see in future quarters and years.
Nothing further to really report over and above what's in the announcement.
Perfect. I appreciate the color. Thank you.
Thank you. Please stand by for your next question. Your next question comes from James Goodman at Barclays. James, your line is open. Please go ahead.
Yeah, morning. Thanks very much. apologies if I missed it, but Jonathan, could you just give the, the usual precise commentary around the ARR development, sequentially in the quarter, maybe nuance between, new customer acquisition and, NRR? Thank you.
Yes, just, as you know, we don't report formally on ARR at the Q1 or Q3 stage. We do that at half year and full year, but as normal, we can give you some color. ARR sequential growth was 2% in Q1 of this year, 3% in Q2, and 3% in Q3. That is very consistent with what we were seeing this time last year as well. That sort of growth, sequential growth in ARR, underpins our confidence in the guidance that we gave at the half year of 11% recurring revenue, and also in consensus, which is, which is in the region of 11% as well. I think that, you know, gives you some more color around the momentum we're seeing at the moment.
Yeah, that's very clear in line with last year. Thank you. Just maybe, with two months to go now only for the full year, would you be able to provide any more color or context around the margin progression that you're expecting for the second half or too early still to say? Thank you.
Good question. We reported first half margin of 20.8%. That was a 60 basis points improvement on the prior year on a constant currency basis. FY23 full year consensus is about 20.8%. We are comfortable with that for the full year consensus. As you know, we guide with regards to margin on a full year basis. We give you an update at the half year on how we performed on margin. As I say, we're comfortable with consensus being at 20.8%.
I think the other important thing just to add on margin is, as you can see, and as we strategically set out, that we do intend and believe it's appropriate to keep expanding the margin as we move forward into future years. That is very consistent with what we've been saying in the past, consistent with what you're seeing this year, and is very much part of the strategic and operational plan for the business.
Very clear. Thank you.
Thank you. Please stand by for your next question. Your next question comes from Toby Ogg at J.P. Morgan. Toby, your line is open. Please go ahead.
Yes. Hey, hey, morning, Jonathan. Couple questions from me. Just on Intacct. Could you just give us an update on how Intacct trended in Q3? Just on the Intacct piece outside the U.S., I know it's small, GBP 18 million ARR at the last full year, but still growing very quickly. Could you just give us an update on how things are tracking here for Intacct outside of the U.S., and specifically on the U.K.? You know, how's the traction as it stands today? You know, what stage are you at currently in the U.K. with the partner ecosystem, and what are the next steps for driving further adoption here in the U.K.? Thank you.
Just in terms of Intacct in North America, that's still running around 30% growth in broad terms. You know, and strong, very strong NCA and also strong, you know, renewal rate by value. If we look outside of the US, Intacct and cloud native products are doing very well in terms of growth, clearly off a much smaller base. Just, you know, just to give you a feel for that, if Intacct North America is running at about 30%, we just reported cloud native recurring revenue growing at 36%. Therefore, by definition, you're seeing Intacct and other cloud native products running at way in excess of 40% growth outside of the US.
And just to sort of, you know, Intacct now is being rolled out. It was launched in, in France in FY23. Critically, Sage Intacct Manufacturing, which is an important vertical for us, has now been launched in France, UKIA, and North America. Sage Active, the other sort of new cloud native product, has been launched in France and Spain already. This is coming off small bases in these new territories. It normally takes a period of time for the customer demand to materialize. It takes a bit of time, as you say, to get the partner channel going, but everything that we've seen in rolling out Intacct to the English-speaking territories two or three years ago for the first time, once that ramps up, it drives good, strong growth. That's great. Thank you.
Thank you. Please stand by for your next question. Your next question comes from Frederic Boulan at Bank of America. Frederic, your line is open. Please go ahead.
Hi. Good morning, Jonathan. Quick question on competition in particular, QuickBooks. Do you see any specific opportunity in the French market with them retrenching from there from next year? Any other changes in competition on your call-out, either in the same vein of, you know, some competitors maybe investing less in some markets, or on the contrary, pushing harder in some areas? You know, update on the-
Mm
... on the general competitive landscape would be great.
Yes. In broad terms, the competitive landscape hasn't really changed. If you look across all of our geographies and all of the segments that we operate in, we are very confident in the offering that we have got against our competitors now. If you look at the renewal rate by value, it tells a bit of a story. You know, we're still running at a renewal rate by value with our existing customer base, in line with what we reported for half year. That was 101%. That was the same as the full year FY22, which was 100%. So that's an 18-month to two-year trend of 101%. This is critical with regards to the competition.
We have been sensible, and understanding in the price increases that we've put through, which is about 4- 4.5%. Some of our competitors have not done that, and we think that is the right time to show support and confidence in our customer base. I think also the other element is cross-sell and upsell, which has been doing very strongly indeed, across our portfolio, but particularly in cloud native in North America. Intacct has a very strong record of that. To your point on competition, not only maintaining very high levels of NCA against the medium segment competitors there, but also with where we're able to have a significantly higher than that 101% renewal rate by value. No, no material changes.
If anything, you know, we're the strategy that we've got, linked to the pricing that we've got and the new functionality is giving us an advantage at the moment.
Great. Thank you very much.
Thank you. Please stand by for your next question. Your next question comes from Charlie Brennan at Jefferies. Charles, your line is open. Please go ahead.
Perfect. Thanks. Morning, Jonathan. Just a couple of questions from me. The first is back on ARR. It's obviously ARR that will set the tone into next year. 3% sequential growth in Q2 and Q3, I think is exactly the same as the trends last year. Can you just give us some sense of what normal Q4 seasonality looks like? I think last year it was +4% in Q4. Do you regard that as normal seasonality, or was that a significantly above normal seasonality quarter? Secondly, if I think more medium term, you've never seen low double digit growth as the ceiling growth aspiration for Sage. You've always considered faster growth scenarios than that.
In order for Sage to be a sustainable growth business, which of the geographies do you think have got to drive that? Have we finally got to see more progress in Europe? Is that the region that's going to drive that growth acceleration? Thank you.
Thank you. Thank you for the questions. First of all, in terms of ARR, you know, as we said, it's, sequentially, it's 2%, 3%, 3%, and that is running against these tougher comparators in Q3 and Q4. That 4% that you called out in Q4 last year is one of those tougher comparators, which is, you know, what has been taken into account in the guidance that we've given today. Looking into the future, I think it's a really good question. We, you know, have said, I think at the half year and at other times, we believe that this company can move into a Rule of 40 type environment.
That is in part as a result of the sort of the trend, the consistency, broad spread resilience of the growth that we're able to deliver. You know, here we are now with a total revenue growth of around 10%, which has been a long aspiration of ours, once we've completed the migration. Strong growth in cloud native, in particular, some parts of that we're saying are, you know, in excess of 40%, and we believe that this is an important component of a Rule of 40 assessment. Running in parallel with that is obviously the margin, and that margin, you know, we called out the trough in the margin as we invested, particularly in product and R&D and marketing in FY21.
Once we've hit that trough, we've said we will consistently begin to start improving that margin, while at the same time, given these growth rates, able to make considerable investments in new product and marketing. That's exactly what we're doing. We've now been doing that for 18 months. As I say, last year was a good improvement in margin. This year, we see another good improvement coming forward, and we think that is a sustainable form of performance of this group. I think that that Rule of 40 is an important benchmark that we will aim for, you know, in forthcoming years. I think, you know, where's that gonna come from? Look, North America is important. You know, at these consistent growth rates, it will begin to get to 50% of total group revenue.
The target, you know, market is very large in North America, and considerably higher than our other territories. UK is strong and resilient, and, you know, as you can see, is doing double digit growth. I think also, as you raise, is Europe. We've, you know, we've been doing, you know, we've been doing these half year and full year and quarterly updates now for some time, and we said on a number of occasions, we will get to, you know, launching cloud native products in continental Europe. We've focused at first in the migrations in North America and UKIA, and that time has now come for Europe with those products that I listed earlier in the call.
We feel confident across the portfolio for slightly different reasons, but it underscores our confidence in this business obtaining a Rule of 40 type of valuation.
Perfect. Thank you so much.
Thank you. We'll now take our last question. Please stand by. Your last question comes from Rahul Chopra at HSBC. Rahul, your line is open. Please go ahead.
Yes, good morning. I have a couple of questions. One, could you please discuss the upsell opportunity from AI productivity tools to the install base, and how should we think about that in terms of your margin versus growth development? The follow-up question would be, when you're talking about Rule of 40, just wanted to get a sense of where do you think we should think, like, you know, in the medium term, should it be like 10% 30% or 8% 32% or like 12% 28% in terms of margin growth versus margin profile? Just what you're thinking in terms of spread between those, please. Thank you.
AI is a very important opportunity for us, and it's twofold. One is driving further efficiencies and automation in our own business. We've done a lot of that already, very successfully. But probably more importantly is the efficiency gains and the smart working and the productivity that this can drive to our SME customer base. I think the, you know, the opportunities there are very considerable. We already have AI embedded in some of our products. Data extraction, error detection, and transaction classification are all embedded in our products and working and have been for some time.
We have the capabilities and the resource to be able to continue to invest in AI, and as you know, we've called out on a number of occasions that our ongoing run rate of investment in R&D and technology is about 16% or 17% of recurring revenue. That will give us ample to be able to invest in AI, particularly as we are growing the business, you know, rapidly at the moment. So, you know, we will update, you know, appropriately as we move through future quarters and years on the developments in this area for us and for our customers. Then Rule of 40, we, you know, we don't give medium-term guidance. We, we believe that we can attain the Rule of 40.
We've given you some good trends of what we can achieve in revenue growth and also in margin. I think at this stage, we'll leave it to that. You can understand the dynamics of the business.
Okay.
Thank you very much. Thank you very much indeed, everyone. Thank you for your questions and attention. Clearly, if you have any further questions, James and the team will be available today and, you know, over the forthcoming week or so, to deal with any questions that you may have. Thank you very much indeed. Goodbye.
This concludes today's conference call. Thank you for participating. You may now disconnect. Speakers, please stand by.