Sage Group PLC

LSE:SGE

Earnings Call Transcript 2023-Q2

[Stephen Hare, Chief Executive Officer]

Hello, and welcome to Sage's First Half Results. I'm delighted to be joined today by Jacqui Cartin, our Group Financial Controller and EVP of Group Finance, whilst Jonathan, our CFO recovers from a recent operation. And I'm very pleased to say that we expect Jonathan back in the office in early June.

So let me take you through the overview. Sage delivered strong results in the first half as we continue to execute on our ambition to be the trusted network for small and midsized businesses. We accelerated revenue growth to double digits, expanded our underlying operating margin, and significantly increased free cash flow.

So there is three key messages I'd like to emphasize today. Firstly, Sage has built strong momentum and this is underpinned by broad growth drivers. Across the group, Sage Business Cloud is delivering significant growth, and this includes not only Sage Intacct and cloud native but also Sage 50, Sage 200, and Sage X3 across our main markets. Demand for our mission-critical, finance, HR, and payroll solutions is robust and it's growing as SMBs continue to digitize.

Secondly, we're accelerating the pace of innovation, expanding our global cloud solutions across our markets, as well as developing new solutions such as Sage Active. Through our growing digital network platform, we're delivering innovative cloud services to customers across Sage Business Cloud and we're well-positioned for the next generation of AI, which we expect will drive significant productivity benefits for customers, for accountants, and for Sage.

And finally, our performance is driven by consistent execution, in line with our strategy. We are leveraging our global scale and expertise across our markets, while at the same time continuing to use our local knowledge to provide solutions to our customers. We're delivering against our strategic priorities with good progress in all areas. And we are optimizing our go-to-market and sales operations, making them more efficient and effective as we focus on scaling the group.

Now, I'll come back later to talk more about our progress. But for now, I'm going to hand over to Jackie for the financial review.

[Jacqui Cartin]

Thanks, Steve, and good morning, everyone. I'm pleased to be here today to share our first half financial results and our full year outlook. And in summary, as Steve mentioned, it's been another strong period for Sage as we continue to execute in line with our strategy. So let's start with the highlights. And just to remind you that all numbers are now reported on an underlying basis, unless otherwise stated.

Firstly, we achieved recurring revenue growth of 12%, underpinned by continued strength across Sage Business Cloud. This reflects positive momentum in all regions. Secondly, operating margin was 20.8% and has continued to trend upwards as we efficiently scale the business. And finally, our cash conversion was again strong at 117%, driven by continued growth in subscription revenue and good working capital management.

Turning to our key growth drivers. ARR growth accelerated to 12%, that's up from 7% this time last year. This growth continues to be well-balanced between new and existing customers and it means that ARR now stands at GBP2.1 billion. That's up more than GBP200 million compared to the prior year. Cloud native ARR growth was 30% with another strong performance from Sage Intacct. And renewal rate by value was 101%, and that's up from 100% this time last year. This was due to good retention rates, strong customer add-ons, and targeted price increases. And we've also added GBP190 million of ARR from new customers, up from GBP150 million in the previous year. The strength we're seeing across these drivers means that we enter the second half with good momentum.

So looking at the P&L. We achieved double digit total revenue growth of 10%, driven by recurring revenue growth of 12% to over GBP1 billion. Operating profit grew by 14% to GBP227 million with margin expanding to 20.8%. On an organic basis, which adjusts for the impact of M&A, operating profit increased by 19%. This has led to growth in underlying EPS of 13% to 15.68 pence. So reflecting the strong performance of the business, we've increased the interim dividend to 6.55 pence, and that's up by 4%.

As you can see from the revenue bridge, our growth continues to be fueled by Sage Business Cloud, which delivered recurring revenue growth of almost GBP180 million or 29%. Importantly, this was driven by both cloud native and cloud connected solutions, with strength from both new and existing customers. This reflects the growing demand from SMBs for digital solutions to automate workflows and gain better insights.

Migrations have also continued to drive growth, especially in cloud connected where the pace of product migration has now accelerated. As a result, revenue to be migrated has decreased by GBP64 million, in line with our strategy. And the impact of all of this is an increase in Sage Business Cloud penetration, which is now 82%. This is up from 72% last year with an increasing number of customers now able to connect to Sages's cloud services and our ecosystem via the Sage Digital Network.

As you can see here, we saw further growth in software subscription revenues, increasing by 18% in the period to over GBP850 million. As a result, subscription penetration continued to increase up to 78%. And as expected, other recurring revenue and nonrecurring revenue continued to decline by 7% and 24%, respectively. Recurring revenue now represents 96% of our total and this really underlines the high quality and resilience of our business.

Now let's take a look at the portfolio view, where we saw particularly strong growth across our cloud solutions. The future Sage Business Cloud opportunity showed continued strength with recurring revenue up by 13% to GBP964 million. And as I mentioned earlier, Sage Business Cloud penetration is now at 82%. Growth of 38% in cloud native to GBP285 million was driven by new customers and supported by migrations. While growth of 25% in cloud connected to GBP502 million reflects good growth from existing and new customers, together with faster migration of products to Sage Business Cloud.

So as you can see, the pace of cloud growth remains significantly ahead of the Group as a whole, with Sage Business Cloud growth now at 29%. And in line with our strategy to focus on solutions with a clear pathway to the cloud, recurring revenue in non-Sage Business Cloud was unchanged at GBP75 million.

Moving now to our regional performance. In North America, we delivered broad-based recurring revenue growth of 17%, mainly driven by the medium segment. Sage Intacct continued to grow strongly driven by further success in attracting new customers and supported by cross-sell and up-sell across the existing base. Our Sage 50 and Sage 200 franchises have also significantly contributed to growth in the region, and as a result, Sage Business Cloud penetration increased to 84%, up from 76% this time last year.

We're seeing continued strength in the UKIA region, where recurring revenue grew by 11%. Growth in the UK and Ireland is 10%. Cloud native growth in the UK was fueled by the small business suite, including Sage Accounting along with Sage Intacct, which is now starting to scale rapidly. This was supported by good levels of growth in Sage 50. And in Africa and APAC, growth accelerated to 15%, driven by Sage Accounting, Sage Payroll and Sage Intacct.

The result of all of this is Sage Business Cloud penetration of 88%, up from 76% last year. And in Europe, recurring revenue growth accelerated to 6%. This includes the impact of the disposal of Sage Switzerland on Central Europe. Organic growth, which excludes the disposal impact was 8%. In France and Iberia growth accelerated to 7%, driven by a good performance across Sage Business Cloud. In Central Europe, growth was 10% on an organic basis with a strong performance in Sage HR. This has resulted in a significant increase in Sage Business Cloud penetration now at 70%, up from 61% last year.

Now the growth we are achieving is fueled by continued investment in the business. As we grow the top line, this creates the headroom for us to invest more in absolute terms, driving sustainable growth, while at the same time, enabling us to expand the margin. This efficient growth resulted in a margin of 20.8%, a 60 basis point increase from the prior year. Investment in sales and marketing is now at 40% of recurring revenue down from 43% last year as we drive efficiencies in our sales motion. And investments in R&D at 17% of recurring revenue, remains a key priority for the Group. And we've maintained a disciplined approach to cost with G&A now running at just 9% of recurring revenue. And importantly, we expect to continue to grow our revenues faster than our costs.

Now let's turn to cash flow. Cash generation remains a core strength of Sage. And in the first half, the group generated GBP266 million of cash from underlying operations, resulting in continued strong cash conversion of 117%. And as a result, free cash flow was GBP194 million, net of interest and tax. Our ability to generate cash supports our strong balance sheet, including cash and available liquidity of GBP1.2 billion. In February, we issued EUR500 million of notes under our new EMTN program, which we used to repay outstanding USPP debt. This has extended our debt maturity profile and diversified our funding sources.

We also completed the acquisition of Sage Earth, an innovative carbon accounting solution during the first half. This means that our net debt leverage at 1.3 times is well within our mid-term target range of 1 times to 2 times. And we retained the flexibility to move outside this range, should business needs require. And importantly, this gives us significant capacity to support both organic and inorganic growth moving forward.

So what does this mean for the outlook? We have built good momentum in the first half, having made further strategic progress to drive strong growth in revenue and margin. Therefore, we are now expecting organic recurring revenue growth to be in the region of 11% for FY 2023. In other respects, our outlook is unchanged. We continue to expect other revenue to decline in line with our strategy. And we expect operating margins to trend upwards in FY 2023 and beyond, as we continue to focus on efficiently scaling the group.

Thank you, and I'll now hand back to Steve.

[Stephen Hare, Chief Executive Officer]

Thanks very much, Jacqui. So our strong performance in the first half is underpinned by our strategic framework for growth. This guides our actions and shapes our decisions as we fulfill our purpose and ambition. It ensures we are all working towards the same objectives and doing so in the right way in line with our values. And it's driven through our five strategic priorities, which I am going to talk about shortly as we seek to deliver value for all of our stakeholders.

Now, knocking down barriers starts with our customers. SMBs represent 98% of all businesses in our key markets and they account for almost two-thirds of private sector jobs. They are the lifeblood of the global economy and our experience over many years is that they tend to be resilient, agile, and quick to spot opportunity.

Now every week, I talk to customers and partners like Ryan Panchoo of Vegan Bakery, Borough 22 who you can see here on this slide. Now he told me recently that despite the economic headwinds, he's optimistic and full of ambition. And this is a message I hear again and again, and it's supported by our recent survey of almost 12,000 SMBs where more than 80% say they're confident about their company's future success. And the majority are set to increase their technology spend over the next year as they continue to digitize.

Overall, the number of SMBs consistently grows. Our analysis predicts 1 million more in our key markets by 2025 as the economy expands and more entrepreneurs pursue their dreams. So against this backdrop, I'm confident in our continued ability to drive growth. We empower SMBs with our solutions, enabling them to automate processes, gain better business insights and comply with regulation. We provide advice and importantly, customers can always access our experts by phone when they need human support.

And we use our position to champion and lobby for SMBs, engaging with policymakers to create a more supportive business environment. The foundation of our customer proposition is our digital network, a set of connected products and services including those shown on the slide that enable our customers to transform their accounting, HR and payroll workflows. The network benefits customers by creating connections between business ecosystems, helping to automate workflows, both within and between organizations. And from inception, it's been designed as a powerful platform for innovation in the area of artificial intelligence with unique scale and access to data.

So, for example, we've used the digital network to develop our accounts payable automation service recently launched in the US, the UK, and France. We've brought Sage Intelligent Time, our smart time assistant to new markets. And we've expanded our outlier detection service which learns from customer behavior, and is now averaging close to 600,000 predictions per week. That's up six-fold in the last three months.

We're also very excited about the developments in Generative AI and the new possibilities it opens up for SMBs to boost productivity and elevate human work. And we're already embracing it, starting next week when we will share with our partners a connected accounting inbox that provides natural language responses built on GPT-4.

And importantly, we're building all of these solutions in line with our values, promoting confidence and supporting our ambition to be the trusted network for SMBs. And looking ahead, our continued investment and strategic partnerships position us well to be a leader in this important and fast-moving area.

So let's turn to our strategic priorities, starting with scaling Sage Intacct. We focused on enhancing the solution and optimizing sales and marketing. And as a result, we grew Sage Intacct ARR in the US by around 30%. And outside the US, we doubled it to GBP25 million, building traction in the UK, Canada, South Africa, and Australia.

Across verticals, Sage Intacct construction and real estate saw new customer additions up by more than 50%. And just last week, we acquired Corecon, cloud native project management solution for the construction industry. We also issued a major new release of Sage Intacct Manufacturing and are working with customers and partners across six countries to drive growth. And feedback continues to be strong. I recently spoke to Phase 3, a professional and managed services provider based in Manchester, and they told me Sage Intacct saves them three days a month of manual effort. And having established Sage Intacct across our English-speaking markets, we're now rolling this solution out in continental Europe, starting with its recent launch in France.

On to our second strategic priority, expanding medium beyond financials. Our new AI-powered service to automate accounts payable is rapidly gaining traction. In the last three months, we processed more than 200,000 invoices for around 3,000 customers across Sage Intacct in the US, Sage 50 in France, and Sage Accounting in the UK. Now this is the same service provided via the digital network to customers of all three solutions, and it's getting some great feedback.

Cambio Communities, an affordable housing operator in Michigan told us accounts payable automation has doubled if not tripled their productivity, elevating their team's work and freeing up time to add value in other areas. And following rapid growth in North America, Sage Intacct Planning, our powerful budgeting tool, is now also available in the UK, South Africa, and Australia.

On to our third strategic priority, which is to build the small business engine. Sage continues to achieve good levels of growth from its small business solutions, including Sage Accounting, Sage HR and Sage 50. And alongside our digital sales, we're also focused on winning over accountants. Sage for Accountants has now been adopted by almost 5,000 practices in the UK, just 18 months after launch. It's fueling new Sage Accounting customers and it's supporting the strong growth of GoProposal and Futrli, our client onboarding and cash flow advisory solutions.

To help accountants better manage their smaller clients, we've also created a new tier of Sage Accounting in the UK to help those taxpayers with the simplest of tax affairs. And we've also launched Sage for Accountants in Canada with further markets expected to follow.

So on to scaling the digital network, which is key to driving the data flows that support more powerful solutions and deliver richer customer experiences. By rapidly growing Sage Business Cloud and the connected services we offer, we are enabling and encouraging more network participation. We're doing this by attracting new customers and by continuing to migrate existing customers and products. And we're making good progress, as Jacqui said, Sage Business Cloud penetration is now up to 82%.

We're also expanding our global cloud solutions, including Sage Active, a cloud-native multi legislation solution for SMBs in Europe. We've just launched this in France. And we are developing new services that are powered by the digital network, adding value for customers and for partners such as Equifax, shown here on the slide, who use our network to streamline credit applications for consumers.

So on to our final priority, learn and disrupt, where we focus on innovating both organically and via partnerships, including with Microsoft and Amazon Web Services, both top-tier sponsors of our Partner Summit in the US next week. Through Microsoft, we've delivered key integrations with products such as Teams to simplify approval and collaboration workflows. And, we've had early access to CoPilot, a new AI-based productivity tool to support our sales teams in France. And we continue to build solutions on both the AWS and Azure platforms, providing our customers with flexibility and choice as part of our multi-cloud strategy.

So let's turn to our stakeholders, starting with our customers. Now, as I said earlier, I talk to customers every week and I'm always inspired by their optimism and can-do attitude as we deliver innovative solutions that remove friction from their lives. Customer satisfaction is a key focus. And whilst we're not complacent, we are really proud to have almost 14,000 five star customer reviews on Trustpilot. We're driving brand awareness with distinctive global marketing and major sports partnerships, including Major League Baseball, The Hundred cricket, and the Rugby World Cup. And these are creating engagement. During the recent Guinness Six Nations, Sage content accounted for a third of all rugby TikTok views.

And for colleagues, we encourage an inclusive high-performing and accountable culture. Our latest group-wide Pulse Survey achieved a response rate of almost 90% and confirm that overall colleague satisfaction is strong. And in December, we published our first Diversity, Equity and Inclusion Impact Report, with improved gender diversity amongst our leadership teams. Now, I visited many of our colleagues during the first half, in North America, Europe and South Africa, and it's been fantastic to see their engagement and passion. And I'd like to thank all colleagues for their efforts in achieving this first half performance.

On to society, where Sage supports sustainable and inclusive growth. Our progress towards net zero by 2040 was recognized in April through our inclusion in the Financial Times Europe Climate Leaders list. And we're also supporting customers on their own journey to net zero, enabling them to use their accounting data to manage their carbon footprints through Sage Earth. And it was a real privilege last month to be there in person to kick-off Sage's partnership with Morehouse College in Atlanta, Georgia, to support more young black people pursuing a career in technology.

And for shareholders, our overriding objective is to create sustainable growth in shareholder value. Now the way we're doing this is by growing revenue in absolute terms and by doing so, more efficiently over time. Now, there are several attributes to our model that give us confidence in this area.

Firstly, our strategic framework is delivering growth in all regions. We're rolling out global cloud solutions across our markets led by Sage Intacct. We're adding value to existing and new customers by delivering new cloud services. And we're scaling and leveraging the digital network to deliver innovative AI-powered solutions, transforming the workflows of SMBs.

Second, Sage is differentiated by our leading technology, the breadth of our business and our human touch. We have deep expertise across financials, payroll and HR, serving a wide range of SMBs across diverse geographies. We're supported by a broad ecosystem of partners, accountants, resellers and ISVs, who enrich and expand the reach of our offering. And we combine our solutions with a human touch, providing business advice and expertise backed by human customer support.

And finally, as we grow the business in absolute terms, this creates headroom both to increase investment and to expand margins. This is helping us to build a scalable platform to deliver sustained efficient growth.

So in conclusion, Sage has had a strong first half, delivering broad-based growth and we enter the second half with good momentum. Our investments have enabled us to accelerate innovation as we find more ways to help our customers to be more productive and more efficient. And we continue to execute well with consistent delivery against our strategy, giving us confidence in the continued success of the group.

So that concludes today's presentation. Thank you very much for watching. And Jacqui and I would now be happy to take your questions.

[Operator]

Thank you. [Operator Instructions] We will now take the first question. It comes from the line of George Webb from Morgan Stanley. Please go ahead.

[George Webb, Morgan Stanley]

Hi. Morning, Steve and Jacqui, and congrats on the first -- strong first half performance. A couple of questions on my end, please. Firstly, just on the margin outlook for the year. You mentioned you're up 60 basis points in the first half, demonstrating how that operating leverage can kick in when you're running at high rates of organic recurring growth. The outlook for the second half is still strong growth. So should we continue to see the benefits of operating leverage into the second half of the year? Or is there any margin seasonality that we should expect?

And then secondly, Steve, you mentioned that Sage for Accountant has nearly -- has been adopted by nearly 5,000 practices. Can you give us a sense of how much further there is to go on that or what level of adoption you think you can get to when you look out a few years? And perhaps also, what's your strategy for marketing and attracting those accountants that perhaps have not been Sage adopters in the past? Thank you.

[Stephen Hare, Chief Executive Officer]

Sure. Thanks, George. And I'll take the second one first and then Jacqui can cover the first one. So on Sage for Accountants, in the UK there's something in excess of around 20,000 accountants in the UK. We're pleased with getting to 5,000. I think we'll just -- we'll keep pushing. We definitely expect to get north of 10,000 quite how far we get in the second half, we'll see. But we see this as a really critical enabler to deal with the second point that you said, which is, this is a really good way of bringing accountants to Sage who have typically perhaps only worked exclusively with one of the other players.

And one of the advantages actually of acquiring GoProposal and Futrli is that both of those have a much higher proportion of customers who are non-Sage customers. And we're very much committed to an open architecture, so we're not saying that deploy Sage for Accountants and then only use Sage with your end user customers. Our aim is very much that usage for accountants and you can also incorporate clients if they're using other people's technology, but we want you to adopt Sage for Accountant to give you that overall integrated experience for your own practice. So we see it as a very important.

Margin, Jacqui?

[Jacqui Cartin]

Yes. Thanks, George. So just in terms of that uplift from the first half last year, 60 basis points. As you mentioned, we've got good operating leverage now coming through from the double digit total revenue growth that's enabling that expansion of the margin but also giving us good capacity to continue to increase investments in absolute terms to drive growth.

Importantly, that is setting alongside efficiencies that we are now continuing to generate in the sales motion. And you've seen the sales and marketing as a percentage of recurring revenue coming down from 43% to 40% in the first half. So that efficient growth is enabling the margin expansion and is very much consistent with what we said we would do.

As we look ahead to the second half, you should expect to see us continue to invest. But importantly, costs will now grow at a slower rate than revenue, and that will enable further expansion of the margin in the second half and also underpins the guidance that we have set out today to expand margins in FY '23 and beyond.

[George Webb, Morgan Stanley]

Very clear. Thank you.

[Operator]

Thank you. We will now take the next question from the line of James Goodman from Barclays. Please go ahead.

[James Goodman, Barclays]

Morning. Thanks for taking my questions. Just firstly, on the outlook for the recurring revenue where you've increased the guidance this morning, encouraging to see, but at the same time, of course, you've delivered a very strong ARR quarter whereas 11.8% now for the first half and you've delivered over 12% recurring for the first half of the year. So anything other than conservatism baked into that for the second half of the year? Or any reason we shouldn't see it much closer to the sort of trajectory of the business currently?

The other question I had was just around the portfolio view of the business. I wondered if you could go into a couple of the moves that seemed a bit more exaggerated this half period. I think the cloud connected growth was quite accelerated at, I think, 25%. The two migrate declined by a similar amount yet the non-Sage Business Cloud was flat. So maybe you could add some context to those movements. Thank you.

[Stephen Hare, Chief Executive Officer]

Sure. Thanks, James. I'll let Jacqui sort of walk through the detail, but just high level on that second point. I think it's a very important point that we continue to see strong growth from the cloud native products across the piece. But we've been saying for some time that enabled by Sage Business Cloud and by the digital network. As we get more and more of our cloud connected customers really connected into that network, it's enabling us to deliver cloud services consistently across that network.

So we've given a few examples of where we are able to deliver the same cloud service, both to our native customers and out to our connected customers. And you'll continue to see us doing this. We've got a number of things in the pipeline where you'll see us being able to really activate that kind of traditional cloud connected network and hopefully, therefore, see stronger growth there. But Jacqui, do you want to?

[Jacqui Cartin]

Yes. Just to add to that, I think the way you should be thinking about it is when we look at that Sage Business Cloud growth in the first half of 29%, as Steve mentioned, that's now much more broad-based supported by both the cloud native and the cloud connected base, which has now grown by 25%. That cloud connected base we added GBP90 million of recurring revenue in the first half driven by that increase in consumption that Steve references. And that's very different to the sort of what you would have seen a few years back where the Sage 50 desktop was migrated and we got one-off ACV uplift. So this is a much more sustainable sort of growth foundation than we've seen previously.

And importantly, you can see that reflected in the fact that the two we migrated, that's declined by only GBP64 million. So the uplift that we're seeing now in cloud connected is much higher and that's driving that broader base growth across Sage Business Cloud.

[Stephen Hare, Chief Executive Officer]

And I think on the -- yes, on the outlook for recurring revenue. I mean the key here really is the second half has much tougher comparators. So I think the way to think about it is we have momentum and our ambition is to continue driving that momentum. And overall, that kind of low-double digit 11% recurring revenue is a good place to be. And as I said, tougher comparators. But if you take the year as a whole, that 11% is obviously above where we -- it's above our expectations of where we were sort of six months ago and shows an increasing confidence that we're really creating and driving that momentum.

[Jacqui Cartin]

And I would just add to that. If you look at the sequential growth in ARR for the first half, we reported 2% in Q1. That was 3% in Q2. So that gives us good momentum as we enter the second half but it's just lapping those tougher comparators, that's creating that more balanced growth as we expected it would when we set out the guidance at the beginning of the year.

[James Goodman, Barclays]

Understood. Thank you.

[Operator]

Thank you. We will now take the next question from the line of Ben Castillo-Bernaus from BNP Paribas. Please go ahead.

[Ben Castillo-Bernaus, BNP Paribas]

Good morning. Yes. Thank you very much for taking my questions. So firstly, just on that ARR growth. Could you talk about just what your maybe expectations are for the exit rate ARR growth for this fiscal year? Obviously, the comps do get tougher to plus 12% versus the plus 7% that you saw in H1. That would be helpful.

And then the second question just around the impact of Generative AI on your OpEx line items. How should we think about that? Should this be seen as a need to increase your R&D intensity to initially build those AI solutions and therefore maybe a margin headwind? Or, is it the opposite where you should see productivity gains and therefore, could be an accelerated margin expansion tailwind? Thank you.

[Stephen Hare, Chief Executive Officer]

I'll take the second one first. I think as far as the R&D is concerned, no, it's not a margin headwind. I mean, within -- we think R&D at that kind of 16%, 17% of recurring revenue is the right place to be. We may do some reallocation within that if we see that that's appropriate. But we see no need to increase it in total.

As far as internal productivity is concerned, yes, I mean, it can only be helpful. I mean we already have examples, historically, particularly areas like finance, where we have deployed machine learning and robotics to drive productivity. Generative AI with its ability to provide greater insights will undoubtedly assist productivity, not just in the back office but also in the front office.

But our real focus is how can we use AI to help our customers. How can we help our small, midsized customers be more productive and say, embedding within our product, which we've been doing for a number of years, but we see a number of opportunities to enhance that. And indeed, next week at our supplier -- sorry, our partner conference in the US, we'll be announcing the release of a Sage Inbox, which is a product which will help all of our customers backed by AI to drive productivity in terms of how they're dealing with routine workflows.

On ARR, I'll just make one comment and then I'll let Jacqui pick it up. I think, look, we don't guide to ARR. But structurally, I think what -- the message I want to leave you with is, I've said for a number of years that our ambition is to drive consistent double digit growth. Now we don't give mid-term guidance but that's the ambition now is to maintain this momentum. And as Jacqui said, sequential growth is really, really important now quarter-on-quarter. But obviously, ARR is a slightly volatile leading indicator. So exactly where we are in that double digit range, we'll see. But our aspiration is obviously for it to be double digit.

[Jacqui Cartin]

Yes. I think I would just add that as Steve mentioned, from a momentum perspective, we entered the second half with strong momentum and really good secular tailwinds in terms of that sort of trend towards digitization and what we are seeing from our customers in terms of demand. Notwithstanding that tougher comparator piece that we've touched upon, we are expecting a good acceleration on the recurring revenue growth from around 9.5% that we reported last year to end the region of 11% for this year. So a good level of acceleration for the full year.

And you can expect the key drivers underpinning that ARR for the full year to continue to be that sustainably low level of churn and good levels of NCA and importantly, continued strength and that cross-sell and up-sell as we continue to invest in the digital network. But clearly, we'll update you in Q3 on the ARR.

[Ben Castillo-Bernaus, BNP Paribas]

Got it. Thank you. Can I just squeeze in a quick follow-up just on the sales and marketing intensity, it was down 3 percentage points year-over-year. Margins were only up 60 basis points. Can you just add a comment on like the offsetting factors in there that drove that margin expansion? Thank you.

[Jacqui Cartin]

Yes. It's a good question. So as I mentioned, we're obviously driving double digit top line revenue growth now, which is creating strong operating leverage. And alongside that, we're driving these efficiencies in the sales motion. The pace that I would withdraw here is whilst the percentage in terms of the recurring revenue, the proportion has decreased. We have continued to increase the absolute level of sales and marketing, that's gone up by about GBP20 million in the first half.

But the combination now of that sort of double digit top line growth with a more efficient sustainable growth engine means that we are now able to continue to drive these more sustainably high levels of revenue growth whilst also expanding the margin, and that's very much consistent with the strategy that we've set out and what we said we would do.

[Ben Castillo-Bernaus, BNP Paribas]

Thank you.

[Operator]

Thank you. We will now take the next question from the line of Alex Nguyen from Jefferies. Please go ahead.

[Alex Hoa Nguyen, Jefferies]

Hi. Good morning. Thank you for taking my questions. I guess if I'm just being a bit critical on the ARR, I saw that the cloud native for this half was growing 30%, which, I think, appears a bit softer compared to other period, if I'm not wrong. So could you provide a little bit of color on that? And if there's anything that we should be aware of?

And then secondly, this for modeling purpose, but I noticed there's a GBP20 million charge this quarter for lease downsizing. And I note the comment that this charge will continue in the second half of the year. And so maybe you could quantify how much would that be? That would be helpful. Thank you.

[Stephen Hare, Chief Executive Officer]

Yes. Just on the first one in terms of market dynamics. I think 30% growth, we continue to grow much stronger than the market average. But obviously, at some point, you sort of slightly get into the law of big numbers. So particularly in Intacct which has been growing at the sort of 30%, 35%, but some periods a bit quicker than that. And also in the smaller business in Sage Accounting, et cetera. Cloud native is now -- I think, we're up to about GBP400 million, GBP500 million -- GBP400 million or something of ARR. And so to continue to grow that kind of 30% is a very healthy number.

Jacqui can talk a little bit about the comparator last year when we did grow at sort of 50% plus, but that was a very sort of unusual half that I think was helped by a number of factors.

[Jacqui Cartin]

I think when we look at the 30% this year, it continues to be underpinned by that re-strength in Sage Intacct, and we continue to see strong levels of demand across Sage Intacct in the US. But importantly, it's also supported by other cloud native solutions, including Sage Accounting and Sage HR. So a good breadth of products within the cloud native portfolio contributing to that 30%.

When we look at the prior year, that was growth of 51% on an underlying basis, but that benefits from the acquisitions that we did in the prior year that included Brightpearl. So if you look at that growth on a like-for-like basis, effectively, it's more like 40%. Whilst as we mentioned, the growth was slightly slower than what it was last year. I think Steve's point on the law of large numbers is very important.

But also I would add that the actual -- the amount that we're adding in terms of ARR continues to grow significantly in absolute terms. We added around GBP140 million of ARR in the first half, so a good level of growth overall. And importantly, it sets alongside the broader-based cloud connected growth that we're now seeing, so supporting that overall Sage Business Cloud piece in totality. But we expect to continue to see those good growth drivers within both cloud native and cloud connected moving forward.

In terms of the property piece, yes, we've reported a GBP20 million charge in the first half of this year, and that's very much just following a strategic review of our leases during the first half of the year. In terms of expectations for the second half, that will be completed that program by the end of September, but it will be below the level that we have reported at the first half, so slightly lower than that GBP20 million for the first half.

[Alex Hoa Nguyen, Jefferies]

That's very clear. Thank you.

[Operator]

Thank you. We will now take the next question from the line of Balajee Tirupati from Citi. Please go ahead.

[Balajee Tirupati, Citigroup]

Hi. Thank you. Balajee Tirupati from Citi. Two questions from my side, if I may. Firstly, could you share your view on North America market where we have, in general, seen a higher degree of macro softening as well as bank challenges? And then also, if you could comment on the UK mid-business segment? While you have Intacct now, your competitors from small business segments are also trying to increase the mid-market mix. Are you seeing any increase in competitive intensity there? Thank you.

[Stephen Hare, Chief Executive Officer]

Sure. On the North American market, I think, in common with a number of the other markets, there are some headwinds, as you mentioned. But I think if you look at the dynamics that we have, the number of small, midsized businesses first of all, is increasing. So there's no reduction in overall number of small, midsized businesses.

And then secondly, small, midsized businesses on average are underinvested in technology. So we've recently done a survey of nearly 12,000 businesses, small, midsized businesses globally, 80% plus said they were confident about their future prospects and over half said they were looking at increasing their investment in technology. So we've had another good half in North America with really North America leading the way in terms of growth growing overall 17% underlying recurring revenue. So we continue to see that as -- it is our biggest market, it's our biggest total addressable market, and we continue to see good prospects there.

In terms of competitors, yes, competitors are talking about moving upmarket. And I think we see that largely as them trying to hold on to their customers for longer. When we compete for new customers, we very rarely see those smaller competitors. It's in the mid-market, in the UK, for example, with Intacct, we're nearly always competing against Oracle NetSuite.

[Balajee Tirupati, Citigroup]

If I can add one question, sir -- one more question there. Your renewal rate has been strong at more than 100%, also aided by pricing actions you have taken. Going forward, what is the view you have in terms of the feedback that you may have received on price increases till date? And what is the view of future price increase?

[Stephen Hare, Chief Executive Officer]

Yes. The view we take on price increases as we have not put through price increases to match inflation at a time when our customers have got economic headwinds. So we've tried to take a kind of fair exchange of value approach. And what we do is we put through price increases that compensate for the sort of salary increases, the wage increases we give to our own people internally so that net-net pricing is not increasing our profitability. Profitability is being increased through our own productivity. So I think this year on price, Jacqui, we've put through what?

[Jacqui Cartin]

Yes, between 4 and 4.5.

[Stephen Hare, Chief Executive Officer]

Yes. And going forward, we will probably take a very similar approach. It is not our intention to put through aggressive inflation-level price increases.

[Balajee Tirupati, Citigroup]

Very useful. Thank you.

[Stephen Hare, Chief Executive Officer]

Thank you.

[Operator]

Thank you. We will now take the next question from the line of Toby Ogg from JPMorgan. Please go ahead.

[Toby Ogg, JPMorgan]

Yes. Hey, morning, Steve and Jacqui. Thanks for the questions. Two from me. First one, just on market share dynamics in the US with respect to Intacct. Clearly, growth continues to look good there and I'm starting to see some divergence now versus NetSuite. Could you just talk a little bit about, yes, the competitive dynamics versus NetSuite? Are you specifically seeing an improvement in win rates? Or would you say this growth is more a function of expanding the coverage across different verticals?

And then just second question on -- again, on the margin and specifically the sales efficiencies you talked about in the sales motion. Could you just give us some specific examples of what those sales efficiencies are? And then when thinking about the sort of the outlook, what are the opportunities for further improvements in sales efficiencies, specifically that are still to come? Thank you.

[Stephen Hare, Chief Executive Officer]

Sure. So I'd take the US first. I think what we're seeing is the win rates actually have been pretty stable. What we're doing though is exactly what you said, which is we are expanding more into verticals and strengthening our presence in a number of verticals. So I think what you're seeing more of is us being able to capture more opportunities. The number one competitor remains Oracle NetSuite in pretty much every opportunity. That's who we're competing against. Depending on the vertical, we may -- it still remains a pretty fragmented market. There are still a lot of specialist suppliers. So if you're in the manufacturing vertical or wholesale distribution, et cetera, you meet different people, but the one continuous competitor is NetSuite. So I would say win rate is pretty stable.

As far as margin efficiency is concerned, I think I would point you to two areas really there is those two parts to this, which is both sales and then marketing. So if we take marketing first, marketing, I think the digital marketing journey is increasing in efficiency all the time. But we're making more use now of global integrated campaigns. So when we're putting together marketing campaigns, we're able to do that now much more on a global basis and then modify them for local consumption. But they're not all completely brand new, separate campaigns. So that -- so we're getting that efficiency in marketing, both from better digitization but also more effective use of campaigns and brand expenditure, et cetera.

And then in the sales part of the equation, you're also seeing us making more of that journey digitized. So a lot of the cost in sales is people. And so as you grow what we're increasingly doing is we're not increasing the number of people that we need in line with revenue. So we're adding less people because we're able to drive more of the journey digitally, both in small and in medium. And yes, we expect that to continue. So as we look to continue to improve the margin, the bulk of that margin improvement will come from sales and marketing efficiencies.

[Jacqui Cartin]

I would just add on that, Toby, the important thing to note here is that the -- once the proportion of spend in terms of sales and marketing is coming down and we are creating those efficiencies in absolute terms that is continuing to grow and to support the sort of higher levels of growth that we are now delivering.

[Stephen Hare, Chief Executive Officer]

Yes.

[Toby Ogg, JPMorgan]

Great. Thank you.

[Operator]

Thank you. We will now take the next question from the line of Kai Korschelt from Canaccord Genuity. Please go ahead.

[Kai Korschelt, Canaccord Genuity]

Yes. Hi, good morning. Thanks for taking my question and congratulations on the strong results and guidance. I had a question around the Intacct rollout outside of the US. I think it's sort of live in France now. It's obviously been a hugely successful product in the US. So my question is sort of why -- what is the limiting factor in terms of the number of geographies and the pace at which you can roll it out? Is it sort of localizing the product? Or is it perhaps calibrating sales? I'm just wondering -- yes, if you could give us a bit more color around that.

And then the second one was around the US market and the IRS there recently, I think, said it will make a sort of free health assessment service available. I know you don't directly play in the sort of turbo [ph] tax type market. But I'm just wondering if that could perhaps over time impact demand for some of the accounting solutions maybe at the sort of micro end of the market. Or do you just feel that it won't impact you at all? Thank you.

[Stephen Hare, Chief Executive Officer]

Sure. So Intacct outside the US, yes, we're now rolling out in Europe. We've started with France, but it is absolutely our intention to go into Germany, Iberia, et cetera. The limiting factor is exactly as you said, it is simply a case of sequencing local compliance and local requirements. It's a global platform so we're not modifying the global product, but we do have to localize it for those markets, and that takes some time. But it is absolutely our intention that our leading financial package for the mid-market everywhere in the world is Sage Intacct.

As far as the US market and the sort of micro end is concerned, I mean, I think we're seeing now in a number of markets, governments starting to seek to bring more people into a digital environment and digital exchange. And within that market, there is always a place for the sort of more basic free self-assessment tools.

As far as Sage a concern in the US, it's not going to materially impact us. We don't really play in the micro end market in the US. We've traditionally not really competed, not really had a product at that micro level. But actually, you can do a comparison with the UK, where we do compete at that level. And we just introduced a new tier of Sage Accounting to do exactly that, which is to focus on people who have very, very simple tax needs in order to start them on their digitization journey.

So it's not -- it doesn't have a material impact on Sage's revenues. Long-term, it may be an opportunity in terms of what we want is for all small, midsized businesses to adopt digital technology, including accounting tools. So net-net, it's a good thing, but it doesn't have a material impact.

[Kai Korschelt, Canaccord Genuity]

That's great. Thank you.

[Operator]

Thank you. We will now take the last question from the line of [indiscernible] from UBS. Please go ahead.

[Unidentified Participant]

Hi. Thank you very much for taking my question. A few for me, please. Firstly, on the bad debt reversal. I think last year, H1 saw GBP7 million reversal. Can you comment on what you've done in H1 this year?

Then secondly, you commented on sales and marketing intensity and how you're increasing headcount less than revenue growth. But could you give us a sense of what your headcount growth has been and what your plan is for the full year? And maybe touch on attrition rates as well. And then finally, can you just touch on your M&A pipeline, maybe some areas of interest and what you've seen around valuation? Thank you.

[Stephen Hare, Chief Executive Officer]

Sure. I'll take those in reverse order. So with M&A, look, we continue to be active. It continues to be an integral part of our strategy to look at acquisitions. We've just this last week, announced the acquisition of Corecon. We're seeing some dampening of valuations. But quality assets are still in scarce supply. So we remain disciplined in terms of we're looking, we're open for business, but we don't have any particular areas where we have like a must-do acquisition. It's more how can we acquire technology and acquire functionality, which we can integrate into the digital network to solve sort of wider pain points for our customers.

On sales and marketing, look, in overall terms, we are broadly holding Sage's headcount pretty flat. What we're doing within that is we are reallocating resources, so we are retraining and moving people into different roles. But it's not our intention to materially grow our headcount either in the second half or in the sort of immediate future. That's an integral part of driving our efficiency in both sales and marketing and elsewhere.

Jacqui, do you want to talk about the bad debt?

[Jacqui Cartin]

Yes. In terms of that bad debt provision for, that was specific to COVID. If you recall, we recognized the provision of around GBP16 million specifically in relation to the risks around COVID. And what we saw during that period was in fact that our customer base was very resilient and that we didn't need any of that COVID bad debt provision. And we released the final portion of that in the first half last year. So that first half margin from the last year includes that one-off release.

When we think about the sort of debtor book in the first half of this year, what I would call out is you continue to see the strong cash conversion that we've delivered of 117%, and that's underpinned by continued strength in working capital management, in particular on the DSO, that has remained very strong in the first half. And therefore, it's fairly consistent with where we were at the year-end. So good signs in terms of the resilience of our customers, notwithstanding these more tough sort of economic circumstances.

[Stephen Hare, Chief Executive Officer]

Thanks, Jacqui.

[Unidentified Participant]

Thank you.

[Operator]

Thank you. That is all the time we have for questions today. I would like to hand back over to Mr. Hare for final remarks.

[Stephen Hare, Chief Executive Officer]

Yes. Just to say thanks, everyone, for dialing in. Really appreciate it. And we look forward to talking to you again actually very shortly when we do the Q3 results in July. And thanks very much.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.