Sage : Q1 2023 presentation transcript

Sage Q1 2023 Trading

Update

Thursday, 19th January 2023

Sage Q1 2023 Trading Update

Thursday, 19th January 2023

Introduction

Jonathan Howell

CFO, Sage Group

Thank you, very much, and good morning, everyone. And welcome to Sage's Q1 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. And just to remind you that all the numbers in the trading statements are now reported on an underlying basis, unless otherwise stated.

So on to 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 £517 million. This was driven by strong growth in Sage Business Cloud of 31% to £390 million, with continuing good levels of growth from both new and existing customers.

Subscription revenue increased by 18% to £422 million. And 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 £151 million. This was driven by continued success in cloud native solutions, including Sage Intacct and Sage Accounting, supported by growth in Sage 50 cloud connected.

And in Europe, recurring revenue grew by 3% to £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 £479 million. Cloud native revenue saw strong growth of 45% to £141 million. This mainly reflects continuing good levels, new customer acquisition, together with the impact of acquisitions in FY'22.

And 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's digital network.

Finally, recurring revenue in the non-Sage Business Cloud portfolio was unchanged at £38 million. And just touching on other revenue, this decreased by 29% to £23 million in line with our strategy. And as a result, total revenue was £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'22. Other revenue will continue to decline in line with strategy. And we also expect operating margins to increase in FY'23 and beyond.

And so, 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.

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

Q&A

Operator: 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 from line of Adam Wood from Morgan Stanley. Your line is open. Please ask your question.

Adam Wood (Morgan Stanley): 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 wondered if you could just give us a little bit of help on how that's trended through the first quarter, and then 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.

Jonathan Howell: Adam, yes, thanks very much for the question. As you know, we only report ARR formerly at half year and full year. But we exited FY'22, as you said, with strong ARR growth of around 12%. And since then, in Q1, we've seen sequential growth of just around 2%. And that, therefore, is line with the - in line with the growth that we saw in Q1 last year. And it's also very consistent with the plans that we had for the business at the beginning of the year. And 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 that we reported in the full year last year.

So 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.

Adam Wood: Perfect. Thank you very much.

Operator: Thank you. Now we're going to take our next question. And the question comes from the line of James Goodman from Barclays. Your line is open. Please ask your question.

James Goodman (Barclays): 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 also 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 should have some pricing tailwind? I think you said 4.5% to 5% sort of annualised pricing tailwind for this year? Or are you seeing some signs of macro impact in areas like the UK in new customer acquisition? So if you could talk about some of the moving parts within that in a bit more detail, that would be very helpful. And then I've got a follow up. Thank you.

Jonathan Howell: Thanks, James. Look, first of all, in terms of ARR, we - 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. But otherwise, I wouldn't read too much into some sort of particular seasonal trends 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

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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, we - our plan for this year is exactly the same, about 4-5% across the whole portfolio. And so that's very consistent with what we did last year.

And then lastly, in terms of macro impact, we have not seen any impact on the business in Q1. We are very mindful of the macroeconomic conditions out there across most of our territories. But so far, we haven't seen that. And 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 have big geographical spread. And therefore, for instance, the US provides 40% of our revenue. And the macroeconomic conditions there are probably a little bit better than other parts of, say, Europe.

And then 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 digitisation and efficiency. So notwithstanding the fact that we are mindful of the macroeconomic environment, there is resilience in our core business. I hope that's helpful.

James Goodman: Yeah, very helpful. Thank you. I'll leave it there. Thanks. It was very comprehensive.

Operator: Thank you. Now we're going to take our next question. And the question comes from line of Kathinka de Kuyper from UBS. Your line is open. Please ask your question.

Kathinka de Kuyper (UBS): Hi. Thank you very much for taking my question. Maybe just looking at 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? And are you still comfortable with where consensus sits at around 90 bps of improvement versus 2022 for the full year? Thank you.

Jonathan Howell: So yes, just in terms of 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 at any given time. I think those who understand, they'd be inflationary impact. We have - about two thirds of our cost base is people and people-related costs. And therefore, at the beginning of this year, we've set out a plan. We've put through what we consider to be appropriate increases for our colleagues around the world. And therefore, we have good visibility and certainty about two thirds of our cost base.

The - there are inflationary impacts on other parts of our cost base, but in aggregate, they're not material. And so therefore, my message is just we need to just focus on the people and 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 live a margin expansion during FY'23 and beyond.

In terms of what we've 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. And we think that is the right place to settle at this stage in the year. Thank you.

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Operator: Thank you. Now we're going to take our next question. And the next question comes from line of Balajee Tirupati from Citi. Your line is open. Please ask your question.

Balajee Tirupati (Citi): Thank you. Good morning, Jonathan. Thanks for taking my questions. Two, if I may. First, could you talk about the competitive dynamics, particularly in the small business segment? With a potential slowing of growth and extension of Making Tax Digital timeline, do you see risk of increased competitive intensity on price increase? And then I have a follow up as well?

Jonathan Howell: Yes. So look, in terms of the competitive dynamic across our portfolio, it's very much unchanged. We haven't seen a change in the competitive environment, nor particularly in the products that have been released, nor indeed and our core territories and core products in terms of pricing. And we - I think the growth that we are achieving is as a result of the investment programmes that we've had over the last two to three years. And as you know, that investment has gone into sales and marketing, with a significant increase in the marketing spend over the last two to three years and also in products.

And 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.

And a very good question on Making Tax Digital. Thank you. If you recall, back in FY'19, the first phase of Making Tax Digital was in relation to larger companies, and did have a material impact on our results in FY'19 in the UK, and therefore impacting also the overall Group results.

In terms of our planning for the second phase of Making Tax Digital, we were very cognisant of the fact that related to smaller companies, and would be spread over a more extended period of time. And so, 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 UK. And so, therefore, although it's disappointing for our customers that Making Tax Digital 2 has effectively been deferred, many of our customers want to digitise their tax submissions and want to make better and more efficient, seamless process.

In terms of the impact upon us, as an organisation at Sage, it's - there's no material impact. Thank you. I hope that was helpful.

Balajee Tirupati: This is helpful. And if I may ask a follow up question.

Jonathan Howell: Yes.

Balajee Tirupati: Just could you talk a bit about Intacct outside of the US and also plans around Sage Accounting expansion?

Jonathan Howell: Yes. Sage - as you know, the bedrock of the Sage Intacct portfolio and customer base is the US where it originated. Two years or so ago, we introduced Intacct into the UK 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 UK have really taken hold of this product. They like it. They are identifying customers for whom it's giving real benefits. And we're seeing good acceleration in the UK and also South Africa, in Sage Intacct.

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