The Sage Group plc (OTCPK:SGGEF) Q3 2024 Sales/Trading Statement Call July 30, 2024 3:30 AM ET
Company Participants
Jonathan Howell - Chief Financial Officer
Conference Call Participants
Adam Wood - Morgan Stanley
Frederic Boulan - Bank of America
Rahul Chopra - HSBC
Sven Merkt - Barclays
Toby Ogg - JPMorgan
Alex Nguyen - Jefferies
Operator
Good morning, everyone. Welcome to the Q3 Trading Update Call for The Sage Group. Your presenters today will be Jonathan Howell, Chief Financial Officer; who is joined by James Sandford, Head of Investor Relations. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions]
I would now like to hand the conference over to Mr. Howell. Please go ahead.
Jonathan Howell
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 £1.7 billion driven by continued growth in demand for our software and services.
Regionally, North America revenue grew by 12% to £786 million with a good performance in Sage Intacct together with continuing growth in Sage 50 cloud and Sage 200 cloud.
In the UKIA region revenue grew by 8% to £497 million. This was driven by some progress in cloud native solutions including Sage Intacct, Sage Accounting and Sage Payroll alongside growth in Sage 50 cloud. And in Europe revenue increased by 6% to £454 million with a strong performance particularly in Sage 200 cloud, HR and Payroll.
Turning now to the main performance drivers. Sage Business Cloud revenue grew by 16% to almost £1.4 billion with growth remaining well-balanced between new and existing customers. Cloud native revenue grew by 23% to £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 £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 £584 million driven by continued growth across Sage Business Cloud.
And 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.
So in summary, Sage has performed well throughout the first nine months in line with expectations. We entered 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.
Question-and-Answer Session
Operator
Thank you. [Operator Instructions] 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.
Adam Wood
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 in 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 that 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.
Jonathan Howell
Adam thanks. Thank you for the question. Look, first of all, just standing back looking at the results, it's 9% total growth -- total revenue growth for the nine-month period, 10% recurring revenue growth. And when we look at the regions, our largest and fastest-growing region in North America grew at 12% with 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 enablement of cloud products to drive SMB efficiency still remains as strong as ever across North America.
UKIA and Europe, they both grew at 8% and 6% respectively. That's dead 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 UK was the standout. We have -- we now have over 1,000 customers in the UK on Sage Intacct.
And 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. And 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.
And in terms of guidance, we 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 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 at the heart of your question, we are confident in the full year outlook that we've given today.
Adam Wood
That's very helpful. Thank you.
Operator
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.
Frederic Boulan
Hi. Thank you very much. Just a follow-up on a previous question, first of all, around the moving parts into the full year. So, if I look at this number you just mentioned the 9.3% that suggests on our math an 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 leads and dynamics? Thank you.
Jonathan Howell
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 16%. That's absolutely in line with our expectations. There was a moderation on the half year growth rate. But don't forget cloud native revenue is now a-third 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. And I think I said this at the half year stage, we -- Sage Business Cloud penetration is now at 90%. And so therefore, as we look forward the Sage Business Cloud growth rate is going to increasingly converge on the group total revenue growth rate. And that's what we're beginning to see. And 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. And so that informs the slowing trajectory of Sage Business Cloud. Thank you.
Frederic Boulan
Thank you.
Operator
Thank you. We will take our next question. And your next question comes from the line of Rahul Chopra from HSBC. Please go ahead. Your line is open.
Rahul Chopra
Hello. I have a couple of questions. The first question is around, as you said you flagged in H1 2024, CFOs taking longer decision times. Could you just give a bit more color in terms of what you're seeing sequentially in terms of the timelines, is it still around the same levels? And maybe can you touch upon in terms of ARR trends, more sequentially, what you're seeing in terms of NCR activity and renewal rate. That's the first question.
The second question is around, could you give more detail around NCR activities? Basically in terms of one of the reasons for NCR activities you have launched new products within Sage Intacct like, for example, construction, manufacturing versus the traditional Sage Intacct products. So could you just a bit more color in terms of what's driving that NCR activity new products versus existing core products as such? Thank you.
Jonathan Howell
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 in the first half stage. In that we said and I repeat it today that we saw signs at the half year stage of CFOs in North America taking slightly longer to make the investment decision and that very much remains the case. But the conditions are stable. We haven't seen the 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 half best-in-class cloud native products in all of our major regions North America, UKIA and Continental Europe.
Renewal rates 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 renewal rate by value of 102%. The critical components there were churn, which remained low and stable at that stage.
Secondly, cross-sell and upsell was strong. It 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 Intacct products. Intacct has now been released in Germany as I say and that's an important step. Intacct covers France and Germany and the UK, and the UK performance has been very impressive. Off a smaller base, it's outgrowing in terms of rate of North America.
The US, the demand is still broad and strong. But we have seen in percentage terms a slight slowing in growth. The UK as I say we have over 1000 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 health care 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, UK and Continental Europe. And don't forget that is in our deepest and broadest vertical where there's a lot of opportunity.
Thank you. Next question please.
Operator
Your next question comes from the line of Sven Merkt from Barclays. Please go ahead. Your line is open.
Sven Merkt
Good morning. Thanks for taking my question. Just one maybe. The 2.5% sequentially 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.
Jonathan Howell
So 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%. And in terms 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. So beyond that at this stage, we're not providing anything more. Clearly we'll give you a full update at the year end.
Sven Merkt
Okay. Thank you.
Jonathan Howell
Thank you.
Operator
Thank you. We will take our next question. Your next question comes from the line of Toby Ogg from JPMorgan. Please go ahead. Your line is open.
Toby Ogg
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.
Jonathan Howell
Yes, if I just take the pricing first. We -- over the last three years, we put through pricing increases of about 4.5% to 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 if we're thinking about margin is it's -- we are comfortable that the various pricing increases that we've put through give us sufficient headroom above any salary increases that we put through in the last two to three years.
Our salary and compensation element of cost is just over two-thirds of our total cost base. So, this pricing increase alongside the pay increases of 4% or so that we 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 seeing there's a 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.
Toby Ogg
Thank you.
Operator
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.
Alex Nguyen
Good morning. Thank you for taking my questions. 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 did slowed down a little bit from 25% in the first half to around 20% to 21% in third quarter. You mentioned that the offerings is 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 these, with the growth deceleration? Has there been more competitive pressures, that you guys are seeing? Or am I reading too much into it?
Jonathan Howell
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 UK; and Sage Payroll.
The absolute levels of ARR builds and acquisition are strong, and have increased on the previous year. It's just coming off a significant larger base, as it now accounts for a of total group revenue, which is leading to this slight decline in the rate of growth. You -- 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 rate of the group. And that's exactly, what we're seeing and is very much in line with our expectations. Thank you.
Operator
That's all the time, we have for questions. I would like to hand back to Mr. Howell for closing remarks.
Jonathan Howell
As ever, thank you very much indeed for your time and your questions. James and the team will be available for the rest of the day and the rest of the week for any follow-up questions that you may have. Thank you very much indeed.
Operator
This concludes today's conference call. Thank you for participating. You may now disconnect.