Good morning, everyone, welcome to the Q3 Trading Update Call for the Sage Group Plc. Your presenter today will be Jonathan Howell, Chief Financial Officer, who is joined by James Sandford, Head of Investor Relations.
I would now like to hand the conference over to Mr Howell. Please, go ahead, sir.
Chief Financial Officer, Sage Group Plc
Thank you very much. Good morning, everybody, and welcome to Sage's Q3 trading update. First, I'll run through the key numbers and the performance of the business, and after that, we can open for Q&A.
Just as a reminder, all numbers in the trading statement are on an organic basis.
Sage performed strongly in the first nine months. We delivered recurring revenue growth of 5% to over £1.2 billion, supported by software subscription growth of 11% to £920 million. And this means subscription penetration increased to 69%, up from 64% last year.
Regionally, North America grew recurring revenue by 7% to £475 million, driven mainly by good performance from Sage Intact. In Northern Europe recurring revenue grew by 4% to £292 million. This reflects accelerating growth in cloud native solutions, including Sage Accounting, and also further growth in Sage 50 cloud connected. And in the international region, recurring revenue also grew by 4% to £454 million with particular strength in cloud connected.
Looking at the portfolio view, recurring revenue for the Future Sage Business Cloud Opportunity increased by 7% to over £1.1 billion. This was underpinned by strong growth in cloud native revenue of 32% to £205 million, mainly through new customer acquisition and supported by migrations to both cloud native and cloud connected solutions. As a result, Sage Business Cloud penetration increased to 66%, which is up from 60% last year.
And finally, recurring revenue in the Other portfolio was down by 11%, in line with our strategy.
Moving on to the third quarter, recurring revenue grew by 6% to £409 million, driven principally by cloud native growth of 37%, together with continued growth in cloud connected. This was strengthened by our programme of additional strategic investment in sales, marketing and innovation.
Sage Q3 Trading Update
Thursday, 29th July 2021
Now, turning to Other revenue. This decreased by 18% to £109 million, in line with expectations. And as a result, total revenue grew by 2.6% to over £1.3 billion, and for Q3, this growth was 5% to £440 million.
Now, finishing on the outlook. Following our strong performance in the third quarter, we now expect full year recurring revenue growth to be slightly above our previous guidance range of 3-5%. The Group's guidance across all other metrics remains unchanged.
And so, to summarise, we delivered a strong performance in the first nine months as momentum in the business continues to strengthen.
Thank you, and now let's open for questions.
Operator: Thank you. We will now begin the question-and-answer session. To ask a question over the audio, press star one on your telephone keypad and wait for your name to be announced. To cancel your request, kindly press the # key. Once again, star one if you have any questions.
Question is from the line of Adam Wood from Morgan Stanley. You may ask your questions.
Adam Wood (Morgan Stanley): Thank you. I've got two, please. First of all, obviously, another nice raise in the guidance for the full year. I wonder if you could just talk about what you're seeing there? So, I imagine the business was really a little bit better than expected in the third quarter. Could you also, more importantly, what you're seeing on the leading indicators, particularly around any kind of comments on ARR, what you're seeing on new customer acquisitions there? Could you give us a feel for what you think the run rate might be for the end of the year on that metric?
And then, secondly, again, another nice acceleration in the cloud native business. Could you talk there, you know, what's happening in terms of the different products contributing to that, and maybe specifically on Intacct, where you're seeing migrations from in that business? Thank you.
Jonathan Howell: Adam, thanks very much indeed. For of all, as you say, we - this is a very consistent performance with what we reported for the first half. The lines of the business that were doing well at the first half stage have continued to do well during the course of Q3, and effectively, all we're seeing is a moving forward of the numbers by another three months. We've slightly outperformed our expectations, and as you can see, in the year-to-date, recurring revenue grew at 5% for the full nine-month period. For Q3 standalone, we grew at 6.1%.
The, you know, to answer the question around ARR progression, which the leading indicator, at the first half stage, we indicated that we were at the bottom of the decline in the growth of ARR, and so, we reported 4.2% ARR growth at the first half stage. What we're seeing now, as we expected, and as we signalled, is an acceleration in ARR growth. And just to give you a sort of a feel, if we're raising our full year guidance for the year, which we are, to slightly
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above the 3-5% range, then as you would expect, ARR as the leading indicator will exit FY21 at a faster growth rate than that.
Just to give a little bit more colour on sequential growth, we are seeing sequential growth now. As you can see, at the Q3 stage, on a constant currency basis for recurring revenue, sequential growth was about 2%. Q2 was about 1%, and Q1 it was about 1% as well. So sequential growth in recurring revenue, we're seeing an increase there, but it was almost double what we were seeing at the first half stage.
In terms of products, it's the same products that we reported on that are driving this growth. Cloud native grew at 32% during the nine-month period. The principle driver of that is Sage Intacct in terms of volume and value in the US, but very strong additions coming in Sage Accounting, particularly in the UK, Sage People, AutoEntry, and SageHR. So, all of those are continuing to grow and to accelerate in terms of the growth rate. And just to put in context, as you know, Intacct, we reported in the US grew at 19% at the half year stage. It is now growing faster than that. But, importantly, the other portfolio of cloud native products, in order to get to a 32% growth rate, are therefore growing considerably faster than Sage Intacct. And all in all, we see a firm upwards trajectory in the growth rate of cloud native.
Adam Wood: That's very helpful, thank you very much.
Operator: Thank you. Our next question is from the line of Ben Castillo-Bernaus from Exane BNP Paribas. Your line is now open.
Ben Castillo-Bernaus (Exane BNP Paribas): Hi, good morning, thanks for taking my question. A question following on from the last one, the trajectory you expect in H2, you know, your expectations for a continued sequential acceleration like you've seen Q3 over Q2 and Q1, or is it plateauing there?
Second question would be, could you just recap the expansion of the Sage Partner Cloud announced last week, and what that will enable. What are your future plans and expectations, particularly in regard to, sort of, hyperscale infrastructure, I think as was mentioned in that press release?
And then lastly, if you could just touch on margins, you know, how you're thinking about the trade-off between your discretionary marketing spend for the rest of this year and into 2022, given the solid results you've seen so far this year, and how you're thinking about that? Thank you.
Jonathan Howell: Yes, thanks very much. First of all, on more colour on growth rates into the second half, you know, we've given clear guidance for the full year. We're moving into the last quarter, so it's just, sort of, fine-tuning at this stage. I think one additional bit of colour is on ARR growth. We don't report ARR at the Q1 or the Q3 stage, only at the half year and the full year, but I can give you a bit of colour. Sequentially, in Q3 it grew at 2.5%. Sequentially Q2, 2%, and sequentially Q1, 1%. And that's just drawing out the trend line that we described at the half year stage, and just putting a few little proof points on that.
Sage Partner Cloud, yes, that's an important development for us in our major territories - France, UK, and North America in particular - taking the old BMS franchise and moving that into a trusted environment, either managed by Sage ourselves or one of our major partners. It has started well in Europe. The uptake is now just beginning to come through as well in
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North America. And to put some colour on the migrations from cloud connected, this is effectively Sage 200 and other products into cloud native, of that growth of 32% that you see at the nine-month stage in cloud native, about a quarter of it comes from migrations. And some of that is Sage Partner Cloud, some of that is moving to Sage HR, which is our cloud native HR solution, and some of it is also as reported, although not too material at this stage, is movement from Sage 50cloud connected to Intacct, where we're seeing that beginning to happen in the UK and North America.
And then your last question around margin. You know, as revenue growth is ramping in the second half, therefore our speed of spend is also ramping just to, sort of, fall in line with the guidance that we set at the beginning of the year, which we reiterated at the first half stage, and we're now reiterating at Q3, very consistent story, is that we anticipate that this additional spend will move the margin up to three percentage points lower than where we were at the end of FY20. And again, it's going to exactly the same places that we highlighted at H1, which is product, and R&D, and also sales and marketing. Those have been the big beneficiaries of the reduced - of the increased investment, and that, you know, and you can see the acceleration in cloud native NCA and up-sell and cross-sell, which we reported today. Thank you.
Ben Castillo-Bernaus:Thank you very much.
Operator: Our next question is from the line of Will Wallis from Numis.
Will Wallis (Numis Securities): Morning, thank you. I want to ask a quick question about the growth rate. Are there any base effects in there? So, for example, on a year-on-year basis, when you're looking back a year, had you been giving anyone discounts, for example, in the recurring revenue line that means that there's been a, sort of, one-off improvement that's not sustainable as you've moved back to normal pricing - and that's a question both on a year-on-year basis and also if you're looking at your ARR for the Q3 versus Q2, that 2.5% growth rate sounds very impressive, is there any sort of base effect there as well?
Jonathan Howell: Yes, very good question. I think there are just two things to be aware of, in terms of year-on-year comparators, one was, if you recall, Q3 last year was the first quarter that we operated in post the beginning of the lockdowns in our major territories. And if you recall that in April last year, we reported that NCA levels were running at about 60% of what they were on a pre-COVID basis. So the first month or so, you know, the first month at least of this quarter was severely impacted by the advent of lockdowns and government restrictions in relation to COVID. However, if you recall, by the end of the year, by the end of the last financial year, we reported that NCA levels were at about 80-90% of what they'd been on a pre-COVID basis, so a very rapid recovery during the course of last year, second half.
In that context, it is a slightly weaker quarter that we've got as a comparator in Q3 last year. But I'll hasten to add, it was nonetheless quite strong. So, we just reported a 6.1% recurring revenue growth in Q3 this year; it was 6.5% last year. So the overall growth rates were not too dissimilar. The big different was the growth rate at this stage last year was declining, the growth rate this year is clearly accelerating.
So, a little bit of an impact on comparators being lapped, but not too much.
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