Sage : Q3 2022 Presentation Transcript

Sage Group plc Q3

Trading Update

Tuesday, 2nd August 2022

Sage Group plc Q3 Trading Update

Tuesday, 2nd August 2022

Operator: Good morning, everyone. Welcome to the Q3 trading updating 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 an answer session. To ask a question you will need to press star one and one to ask a question. I would now like to hand the conference over to Mr Howell. Please go ahead.

Q3 Key Numbers and Performance

Jonathan Howell

Chief Financial Officer, Sage Group plc

Thank you very much. Good morning, everyone 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. And, as a reminder, all numbers in the trading statement are on an organic basis.

Strong Performance

Delivered against strategic priorities

Sage performed strongly in the first nine months as we continued to deliver against our strategic priorities. Recurring revenue increased by 9% to over £1.3 billion, driven by Sage Business Cloud growth of 20% to £886 million. Software subscription revenue grew by 14% to £1.1 billion. As a result, three-quarters of our total revenue is now on subscription, up from 69% last year.

Regional performance

Regionally, North America increased recurring revenue by 13%, with accelerating growth in Sage Intacct, together with growth in cloud connected. In Northern Europe, recurring revenue grew by 7%. This was driven by continued success in cloud-native solutions - in particular, Sage Accounting, Sage Intacct and Sage HR - and was supported by good levels of growth in Sage 50 cloud connected. And in the international region, recurring revenue grew by 5%, with growth across the Sage Business Cloud. This was supported by further progress in migrations.

Portfolio view

Looking at the portfolio view, recurring revenue for the Future Sage Business Cloud Opportunity increased by 11% to over £1.2 billion. This was underpinned by a strong performance in cloud native, where recurring revenue grew by 42% to £297 million. This was driven by good levels of new customer acquisition. And cloud connected has also continued to grow strongly through both new customer acquisition and further progress in migrations, and, as a result, Sage Business Cloud penetration has increased to 72% - this is up from 67% last year - with more customers able to connect to Sage's digital network. Finally, in the non-Sage Business Cloud portfolio, recurring revenue was down by 11%, in line with our strategy.

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Sage Group plc Q3 Trading Update

Tuesday, 2nd August 2022

Q3 recurring revenue growth

Now moving on to the third quarter, recurring revenue growth continued to accelerate, increasing by 10% to £464 million, supported by continued investment in sales, marketing and innovation.

Other revenue

Now turning to other revenue, which decreased by 25% to £82 million, in line with expectations, and, as a result, total revenue grew by 6% to over £1.4 billion; and, for Q3, this growth was 7% to £488 million.

Outlook

Good momentum

Finishing on the outlook, we now expect organic recurring revenue growth for FY22 to be towards the top end of our guidance range of 8-9%. Guidance across other metrics remains unchanged. And so, in summary, Sage has delivered a strong performance in the first nine months, entering the final quarter of the year with good momentum.

Thank you. And now let's open up for questions.

Q&A

Operator: Ladies and gentlemen, we now begin a question and an answer session. If you wish to ask a question, please press star one and one on your telephone. Please stand by, we are taking our first question and it's from the line of Adam Wood from Morgan Stanley. Please go ahead.

Adam Wood (Morgan Stanley): Hi, good morning, Jonathan. Thanks for taking the question. Congratulations on another good quarter. First of all, just on the recurring that's stepped up, obviously driving that is the ARR. Could you maybe just give us an update on where we are with ARR in the third quarter and how that's been trending through the year?

And then I guess on the macro side you say in the release that you're mindful of trends there, but I guess the guidance - the moving to top end of guidance, the fact that you're mindful and no more than that suggests that you're not seeing anything on that. Could you maybe just talk a little bit about, you know, trends in the business around renewals and NCA, and so on, just to confirm that? Thank you.

Jonathan Howell: Yes. Thank you, Adam, for the question. Yes, as you can see this has been a strong quarter and a good performance for the first nine months. And if we just look at recurring revenue first, how that's progressed during the year, before we move to ARR. At Q1, we reported recurring revenue growth of just below 8%. At the first half stage we reported recurring revenue slightly above 8%, and now, as you can see, for Q3 year-to-date we've reported recurring revenue growth of approaching 9%; and Q3 stand-alone was 10% growth for recurring revenue. And so, you know, by definition, as you know, that means that we are seeing good progressive growth in ARR, and if you just - you know, if I give you a snapshot of where we are, Q3 sequential growth in ARR was 3%, Q2 was 3% and Q1 sequential growth was 2%. That gives you the progression. As you know, we only report ARR at the half-year and the full-year stage, and so, clearly, when we report full-year numbers at the year-end we'll give you an update then.

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Sage Group plc Q3 Trading Update

Tuesday, 2nd August 2022

In terms of macro, it's very much, you know, as we've said in the release. That performance that we have seen gives us confidence to raise guidance towards the top end of the range of 8-9%, and just to confirm that, at this stage, we have not seen any impact from the macroeconomic environment on our business. So in terms of, you know, upsell and cross- sell, NCA and migrations, those are continuing at the same type of trend and same type of performance that we've seen for much of the year. We are mindful of the outlook, we've given very clear guidance for the full year, and, clearly, as we move through Q4 and into Q1 we'll continue to monitor the performance of the business and update you at the year-end.

Adam Wood: Okay, that's very helpful. Thank you.

Operator: Thank you for your question. We are now taking our next question, so please stand by. And the next question from Varun Rajwanshi from J.P. Morgan.

Varun Rajwanshi (J.P. Morgan): Hi, morning. Thanks for letting me on. I just have one question on your cost base. Can you comment on the progression of your strategic investments - in go-to-market, developing new products, etc. - into the second half? And with the macro deteriorating, how would you think about striking a balance between investments and protecting your margin as we look into next year? Thank you.

Jonathan Howell: Yes. In terms of the investment programme, as you know we've reallocated considerable spend to product, R&D and also marketing. That has continued and that is, I think, you know, being demonstrated by the strong growth that we're seeing in cloud native in particular, where for the nine months to date we've seen a 42% growth in recurring revenue, and cloud connected, which is also growing at 12%. And so those are our core product sets, and the growth that you're seeing is being driven by the additional investment.

And I think, just on that, we - you know, we've got a very good product set now across North America and UK/I, but we're now rolling out cloud-native products across the international region. And if you just look back over the last nine to 12 months or so: France, we've got Sage Intacct manufacturing, you know, one of our premier cloud-native products released; Spain, Sage Accounting; Germany, Sage HR, you know, which has been very successful in Northern Europe and North America; and France, we've just launched Sage Active. So that investment is continuing and continuing at pace.

In terms of, sort of, margin, you know, as you know we entered this financial year reporting a margin of 19.3% for FY21. Our guidance was that during the course of FY22 and beyond we would see that margin trend upwards. We've repeated that guidance at Q1 in the first half stage and now at Q3, and we feel confident that we will achieve that margin guidance for FY22. And I note that analyst consensus is around 20% and we feel comfortable with that.

Looking further ahead to FY23, our target is to continue to increase the margin. We will monitor that carefully and, all things being equal, that's very much our target, but we will have to continue to monitor the performance of the business.

Varun Rajwanshi: Right, thanks for the colour.

Operator: Thank you for your question. We're going, now, to take our next question. It's from the line of James Goodman from Barclays. Please go ahead.

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Sage Group plc Q3 Trading Update

Tuesday, 2nd August 2022

James Goodman (Barclays): Morning. Thank you very much. Yeah, encouraging developments on the recurring, on the ARR side. Just to look quickly at the other revenue, which has become very small now. Clearly, in the mix, but still declining very quickly. Just wondered, are we close to stabilisation there now? Is it just the license that's still coming out of that line?

And then, secondly, just on Xero. We've seen freemium products from Xero, perhaps around Making Tax Digital. Just wondered if that's something that you would consider at the Sage Accounting product side? Thank you.

Jonathan Howell: Yes. James, thank you very much for the questions. You're absolutely right, you know, in your question, that the other revenue line is now becoming, you know, a significantly much smaller part of our total revenue, it's about 5-6%, and, you know, as you know, for the last four years or so that's been a key part of our strategy, to migrate away from on-premise licenses and professional services. That, you know, has provided us the opportunity and the investment to move the business towards subscription.

So what we've seen in the first nine months of the year is a decline of 25%; that's pretty consistent with what we saw last year. That is also consistent with what we anticipate for Q4 and we do anticipate those - you know, a continued decline in that other revenue line. That, in part, will depend upon, you know, the strategic investments that we make across the rest of the business, you know, and we'll keep you updated.

And then the other part of your question, sorry, that was in relation to…

James Goodman: Just in relation to Xero releasing a freemium version of their product and whether you would consider that for Sage Accounting or see that as relevant as we move towards the next phase of Making Tax Digital?

Jonathan Howell: Yes, thank you. Thank you, James. First of all, the - if you recall, back in, you know, sort of, FY19 and, you know, Making Tax Digital, the first phase of it in the UK was a very significant driver of our business, and that, because that hit, you know, the Sage 50 cloud-connected base, which is where we are very, very strong in the UK. What we are seeing with the second phase of Making Tax Digital is a move to smaller businesses and over an extended period of time, right the way through to FY24. So it's in smaller businesses and over a much more extended period of time to the deadline, and so, therefore, by definition, it will not have such a material impact on our business and so, therefore, I don't think there's - this is an environment where we will be competing overtly on price; you know that's not our strategy.

I think the other thing that's just worth, you know, pointing out is that we will continue to offer a full range of services, you know, for our small businesses. One of those will be, that we see, you know, increasing around the world, is the digitisation of government and tax- related returns. And so whilst I wouldn't necessarily focus on this one event in the UK, it is a strong and growing secular trend around the world, which is going to be a driver of our business over a number of years into the future.

I hope that helps, James. Thank you.

James Goodman: Yeah, it does. Thank you.

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