Release Date: November 20, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Sage Group (The) PLC (SGGEF, Financial) achieved double-digit ARR growth for the third consecutive year, driving robust revenue growth across all regions.
- The company delivered a record operating profit with a significant margin expansion of 220 basis points, reaching 22.7%.
- Sage Group (The) PLC (SGGEF) reported excellent cash conversion of 123%, resulting in a significant uplift in free cash flow.
- The introduction of Sage Copilot, a GenAI-powered digital assistant, has seen strong engagement and adoption, enhancing productivity for customers.
- The company has a strong balance sheet with GBP1.1 billion of cash and available liquidity, supporting a share buyback program of up to GBP400 million.
Negative Points
- Renewal rate by value decreased slightly to 101% from the previous year's 102%, indicating a slight decline in upsell and cross-sell activities.
- There was a noted slowdown in Sage Intacct's growth in North America, attributed to CFOs taking longer to make investment decisions.
- The company's other revenue declined by 11%, reflecting the ongoing strategic transition and impacting total revenue growth.
- Despite strong performance, the competitive environment remains challenging, with competitors like Intuit and SAP expanding into the SMB space.
- R&D investment as a percentage of sales decreased, raising concerns about potential underinvestment in innovation and product development.
Q & A Highlights
Q: Could you discuss the sequential ARR build and any differences by geography? Also, how are you approaching investment phasing given the strong end to the year on margins?
A: Jonathan Howell, CFO: We saw strong ARR growth, exiting FY '24 with an 11% growth rate. Sequential ARR growth was between 2% and 2.5% in the first three quarters, picking up to 3.5% in Q4, driven by focused sales execution, particularly in the US and Europe. This momentum supports our FY '25 revenue growth guidance. On margins, we achieved a 22.7% operating margin, expanding by 220 basis points. We prioritize growth-led investment but will dynamically reallocate resources as needed.
Q: Regarding the revenue growth outlook of 9% or above, what macro assumptions are built into this, and how do you plan to scale Sage Copilot?
A: Stephen Hare, CEO: For Sage Copilot, we have 8,000 early adopters and plan to start monetizing soon. We'll scale gradually, incorporating it into suites or charging separately. On revenue growth, Jonathan Howell, CFO, noted our ARR exit rate of 11% provides momentum. The guidance is based on current pipeline and deal closure rates, and while cautious, it reflects confidence in our outlook.
Q: Can you break down the renewal rates of 101% in terms of pricing, cross-sell, and churn? Also, could you detail the new customer acquisition (NCA) activity?
A: Jonathan Howell, CFO: Renewal rates were solid at 101%, with strong retention and low churn. Price increases were about 5%, consistent with previous years. Cross-sell and upsell were slightly softer in North America. NCA was robust at GBP190 million, driven by Sage Intacct in North America and the UK, with Intacct growing 24% in the US and over 60% elsewhere.
Q: How do you view the competitive environment, particularly with Intuit and SAP targeting SMBs? Are you satisfied with your growth in the US?
A: Stephen Hare, CEO: Intuit is trying to retain customers longer, but we don't see them in new customer acquisitions where Oracle and NetSuite are our main competitors. SAP is more present in Europe and South Africa. While the market is competitive, it's not intensifying. We're focused on accelerating growth, especially with Sage Intacct, which grew 25%. We're also expanding cloud services and seeing consistent growth geographically.
Q: How are you balancing margin and growth, especially with companies like Intuit investing heavily in AI? What should we expect for margins in FY '25?
A: Stephen Hare, CEO: We're prioritizing growth, aiming for the rule of 40 (ARR growth plus EBITDA margin). We're investing in sales, marketing, and R&D, particularly in AI. While we expect margin progress, for FY '25, anticipate being at the lower end of the 50 to 100 basis points range as we focus on investment. Jonathan Howell, CFO, confirmed this approach, emphasizing continued investment in Copilot and cloud products.
Q: Can you provide details on recent acquisitions and their impact on FY '25?
A: Jonathan Howell, CFO: We've completed three small acquisitions: Bridgeton, Infinio, and Amber. Their impact on FY '24 revenue was minimal, with an ARR contribution of about GBP5 million. We'll continue exploring M&A opportunities within our disciplined capital allocation framework.
Q: What are your expectations for pricing in FY '25?
A: Stephen Hare, CEO: For FY '25, we expect price increases in the range of 4% to 5%, slightly narrowing from the previous 3% to 5% range. We'll be thoughtful about customer cost pressures and aim to provide fair value.
Q: How do you see the state of suite penetration and potential for upsell in regions?
A: Stephen Hare, CEO: Suite penetration is in early stages, but we see it as a growth driver by simplifying product access for customers. We expect it to enhance penetration across HR and payroll, though it's too early for detailed metrics.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
