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Good morning, everybody, 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. Just as a reminder, all numbers in the trading statement are on an organic basis. Sage performed strongly in the first 9 months. We've delivered recurring revenue growth of 5% to over GBP 1.2 billion, supported by software subscription growth of 11% to GBP 920 million. And this means subscription penetration increased to 69%, up from 64% last year. Regionally, North America grew recurring revenue by 7% to GBP 475 million, driven mainly by a good performance from Sage Intacct. In Northern Europe, recurring revenue grew by 4% to GBP 292 million. This reflects accelerating growth in cloud-native solutions, including Sage Accounting and also further growth in Sage 50cloud Connected. And in the international region, recurring revenue also grew by 4% to GBP 454 million, with particular strength in cloud connected. Looking at the portfolio view. Recurring revenue for the future Sage Business cloud opportunity increased by 7% to over GBP 1.1 billion. This was underpinned by strong growth in cloud-native revenue of 32% to GBP 205 million, mainly through new customer acquisition and supported by migrations to both cloud-native and cloud-connected solutions. As a result, Sage Business Cloud penetration increased to 66%, which is up from 60% last year. And finally, recurring revenue in the other portfolio was down by 11%, in line with our strategy. Moving on to the third quarter. Recurring revenue grew by 6% to GBP 409 million, driven principally by an acceleration in cloud-native growth of 37%, together with continued growth in cloud connected. This was strengthened by our program of additional strategic investments in sales, marketing and innovation. Now turning to other revenue. This decreased by 18% to GBP 109 million, in line with expectations. And as a result, total revenue grew by 2.6% to over $1.3 billion. And for Q3, this growth was 5% to GBP 440 million. Now finishing on the outlook. Following our strong performance in the third quarter, we now expect full year recurring revenue growth to be slightly above our previous guidance range of 3% to 5%. The group's guidance across all other metrics remains unchanged. And so to summarize, we delivered a strong performance in the first 9 months as momentum in the business continues to strengthen. Thank you. And now let's open for questions.
[Operator Instructions] Question is from the line of Adam Wood from Morgan Stanley.
I've got 2, please. First of all, obviously, another nice middle raise in the guidance for the full year. I wonder if you could just talk about what you're seeing there. So I imagine the business was running a little bit better-than-expected in the third quarter because you also, more importantly, talk about what you're seeing on the leading indicators, particularly around any kind of qualitative comments on ARR. What are you seeing on new customer additions there? Could you give us a feel for what you think the run rate might be at the end of the year on that metric? And then secondly, again, another nice acceleration in the cloud-native business. Could you talk there what's happening in terms of the different products contributing to that? And maybe specifically on Intacct, where you're seeing the migrations from in that business?
Adam, thanks very much indeed. First of all, is just saying, we -- this is a very consistent performance with what we reported in the first half. The lines of the business that we're doing well at the first half stage have continued to do well during the course of Q3. And effectively, all we're seeing is a moving forward of the numbers by another 3 months. We've slightly outperformed our expectations. And as you can see, in the year-to-date, recurring revenue grew at 5% for the full 9-month period. For Q3 stand-alone, we grew at 6.1%. The -- to answer the question around ARR progression, which is the lead indicator. At the first half stage, we indicated that we were at the bottom of the decline in the growth of ARR. And so we reported 4.2% ARR growth at the first half stage. What we're seeing now, as we expected and as we signaled, is an acceleration in ARR growth. And just to give you a sort of a feel, if we're raising our full year guidance for the year, which we are to slightly above the 3% to 5% range, then as you would expect, ARR, as the leading indicator, will exit FY '21 at actually faster growth rate than that. Just to give a little bit more color on sequential growth. We are seeing sequential growth now. As you can see at the Q3 stage, on a constant currency basis for recurring revenue, sequential growth was about 2%. Q2 is about 1% and Q1, it was about 1% as well. So in sequential growth in recurring revenue, we're seeing an increase there, but it is almost double what we were seeing at the first half stage. In terms of products, it's the same products that we reported on that are driving this growth. Cloud-native grew at 32% during the 9-month period. The principal driver of that is Sage Intacct in terms of volume and value in the U.S., but very strong additions coming in, in Sage Accounting, particularly in the U.K., Sage People, AutoEntry and Sage HR. So all of those are continuing to grow and to accelerate in terms of the growth rate. And just to put in context, as you know, Intacct, we reported, in the U.S., grew at 19% at the half-year stage. It is now growing faster than that. But importantly, the other portfolio of cloud-native products in order to get to a 32% growth rate are, therefore, growing considerably faster than Sage Intacct. And all in all, we see a firm upwards trajectory in the growth rate of cloud-native.
Our next question is from the line of Ben Castillo from Exane BNP Paribas.
Question following on from the last one, the trajectory you expect in H2; your expectations for a continued sequential acceleration, like you've seen Q3 over Q2 and Q1 or sort of plateauing there.Second question would be, could you just recap the expansion of the Sage Partner Cloud announced last week, what that will enable? What are your sort of future plans and expectations, particularly in regard to sort of hyperscale infrastructure, I think, as you always mentioned in the press release? And then lastly, if we could just touch on margins, how you're thinking about the trade-off between your discretionary marketing spend for the rest of this year and into 2022, given the solid results you've seen so far this year and how you're thinking about that.
Yes. First of all, on sort of more color on sort of growth rates into the second half. We -- as we've given clear guidance for the full year. We're moving into the last quarter. So it's just sort of fine-tuning at this stage. And I think one additional bit of color is on ARR growth. We don't report ARR at the Q1 or the Q3 stage, only at the half year and the full year. But I can give you a sort of a bit of color. Sequentially, in Q3, it grew at 2.5%; sequentially Q2, 2%; and sequentially Q1, 1%. And that's just drawing out the trend line that we described at the half year stage and just putting a few little proof points on that. Sage Partner Cloud, yes, that's an important development for us in our major territories, France, U.K. and North America in particular, taking the old BMS franchise and moving that into a hosted environment, either managed by Sage ourselves or all one of our major partners. It has started well in Europe. The uptake is now just beginning to come through as well in North America. And to put some color on the sort of -- the migrations from cloud connected, this is effectively sort of Sage 200 and other products into cloud native. Of that growth of 32% that you see at the 9-month stage in cloud native, about 1/4 of it comes from migrations. And some of that is Sage Partner cloud, some of that is moving to Sage HR, which is our cloud-native HR solution. And some of it is also as reported, although not too material at this stage, is movement from Sage 50cloud Connected to Intacct, where we're seeing that beginning to happen in the U.K. and North America. And then your last question around margin. As revenue growth is ramping in the second half, therefore, our speed of spend is also ramping to sort of fall in line with the guidance that we set at the beginning of the year, which we reiterated at the first half stage, and we're now reiterating at Q3, a very consistent story is that we anticipate that this additional spend will move the margin up to 3 percentage points lower than where we were at the end of FY '20.And again, it's going to exactly the same places that we highlighted at H1, which is product and R&D and also sales and marketing. Those have been the big beneficiaries of the reduced -- the increased investments, and that -- and you can see the acceleration in cloud-native NCA and upsell and cross-sell, which we've reported today.
Our next question is from the line of Will Wallis from Numis.
I wanted to ask a quick question about the growth rates. Are there any sort of base effects in there? So for example, on a year-on-year basis, when you're looking back a year, have you been giving anyone discounts, for example, in the recurring revenue line, that means that there's been a sort of one-off improvement that's sort of not sustainable as you move back to normal pricing? And that's a question both on a year-on-year basis and also, if you're looking at your ARR for the Q3 versus Q2, that 2.5% growth rate sounds very impressive. Is there any sort of base effect there as well?
Yes. Good question. I think there are just 2 things to be aware of in terms of sort of year-on-year comparators. One was, if you recall, Q3 last year was the first quarter that we operated in post the beginning of the lockdowns in our major territories. And if you recall that in April last year, we reported the NCA levels were running at about 60% of what they were on a pre-COVID basis. So the first month or so, the first month at least of this quarter was severely impacted by the advent of lockdowns and government restrictions in relation to COVID. However, if you recall, by the end of the year -- -- by the end of last financial year, we reported that our NCA levels were at about 80% to 90% of what they've been on a pre-COVID basis. So a very rapid recovery during the course of last year's second half. In that context, it is a slightly weaker quarter that we've got as a comparator in Q3 last year. But I'd hasten to add, it was still nonetheless quite strong. So we just reported a 6.1% recurring revenue growth in Q3 this year, it was 6.5% last year. So the overall growth rates were not too dissimilar. The big difference was the growth rate at this stage last year was declining. The growth rate this year is clearly accelerating. So a little bit of impact on comparators being lapped, but not too much. And then secondly, in terms of pricing, this has been a year of very few price increases across the whole portfolio, a modest impact. There have been 1 or 2 isolated areas. For instance, in the U.K., we had unwind of pricing discounts, which had an impact. But if you take the whole portfolio across the whole group, a very, very limited impact from pricing during the course of this year. And so that should not be factored into the thinking.
Just to sort of come back on that. Did you give any sort of holidays, payment holidays to any of your customers at the beginning of the pandemic, which has now effectively gone away because the customers are still there and are now paying properly and therefore, that's helping the growth rate?
Good question. And it's probably worthwhile just updating the commentary on that. So if you recall, at Q3 last year, full year last year and H1 this year, again, it was a very consistent story. We were offering our customers payment holidays or deferred credit terms on a case-by-case basis, where we think that was -- would make us a real beneficial impact to a customer and was something that we wanted to do. The uptake on that was very, very low across our customer base. And I can sort of continue to report that the uptake is still very low and the impact on the reported numbers last year and this year is completely not material.
Our next question is from the line of Stacy Pollard from JPMorgan.
Two for me. You touched on ARR exiting the year. How do you think about midterm sustainable revenue growth rates? Do you think that the previous prepandemic rates of sort of 7%, 8% growth are realistic, and think to the midterm? And secondly, how have you kind of measured or seen the success of your additional spend? So you've obviously been accelerating the business throughout this year. You're continuing to make the investments that you wanted for this year because of that success, do you think you're now at the right level of investment base, meaning that kind of further top line acceleration would actually drop-through to margins more aggressively starting from next year?
Yes. So I think just in terms of the investments and return on investment, it's -- we've had a marked step-up investments over the last 18 months. We've kept you abreast of the significant increases, particularly in product and R&D, which is now at 17% of recurring revenue; and similarly, sales and marketing up 42%. And then literally, with a sort of a lag of about a quarter or so, we're seeing this uptick in growth rates, particularly in cloud native, where we're running at 37% growth in cloud-native in Q3 with the fastest parts of the portfolio growth coming from non-Intacct. That is -- obviously, is measured against our normal ROI, LTV, LTV-to-CAC, and all of it is value generative for the business. And we will continue to invest but only, only if we believe it is value generative and is the right thing to do for the medium term of the business. And in terms of trajectory, as we've said in the past, we've got a nice problem at the moment, which is that we're accelerating investments as growth accelerates. However, as we move forward into FY '22 and FY '23, our lead objective is growth in cloud-native and growth in Sage Business Cloud. And then our second objective, but only over time, will be to very gradually improve the margin. So it will be growth-ed and not sort of margin-ed as we come through the next 2 years or so. In terms of medium-term growth rates, I think if you go back sort of 2 to 3 years, when we started this transition, sort of second quarter -- first, second quarter FY '19, one of the things that we cautioned against was extrapolating too much into the immediate short-term growth rates. And the reason for that was that we have a portfolio across -- in small and medium segment, across a good number of territories with very different customer and cloud characteristics. And therefore, we knew that some periods of transition of the portfolio would be very rapid. And we'll give an overperformance in growth rates and other periods would appear to be giving an underperformance either side of a medium-term trend. And we saw exactly that in FY '19 and the first half of FY '20, when we migrated, substantially, all of the Sage 50 base and all of the Sage 200 base very rapidly in North America and Northern Europe, which was also assisted by making tax digital. And so we exited FY '20 with an ARR growth rate of about 13%. And I think the U.K. recurring revenue growth rate was about 15% or 16%. That was an outperformance driven by those very rapid migrations. We were then sort of -- we've now sort of traded through much of the impact of the COVID environment and the business lockdowns that our customers have experienced. And we're heading back to a more normalized growth rate. We don't give medium-term guidance, Stacy. But I think one of the things is if you look forward to FY '22 consensus, it's around 7% or 8% recurring revenue growth at this stage. That seems a sensible place to be positioned and as we sort of come to the back end of FY '21 and are sort of just setting up our jump-off point for next financial year. So when we get to the year-end, off the back of that consensus of about 7% to 8% recurring revenue growth for FY '22, we'll be able to give you some slightly more precise guidance.
The next question is from Mr. James Goodman from Barclays.
Firstly, just on the nonrecurring business. I appreciate the very deliberate strategy there to decrease that line over time. But if I look at the comp, minus 35% last year, I had thought it might just bounce a little bit as some of your services come back. So just wondering if you might still expect that. And maybe if you could just comment on the extent to which there is still any real substitutions still coming out of that line into the recurring line will be. I appreciate that that's now quite small. Is there any commentary around the anticipated development of that? And then secondly, just on Sage Accounting, specifically, I know we've discussed in the past, metrics around this business, and you don't want to give precise subscriber numbers. I happen to notice on your website that you're calling out 1 million business owners on Sage Accounting. So I wondered if you could comment on that, whether that's users or you sort of accelerated to that level of subscribers, anything on the sort of ARPU that we can discern from that, just the progression of that project -- product. And you also mentioned, I think just now, some migration, a small amount from Sage 50 C to Intacct. I suspected you might see a little bit more the other way from say 50 C to Sage Accounting, so anything on that would be helpful.
In terms of the other revenue line, I think in your question, you are absolutely spot on. We're now very much in an environment where the priorities of the business in small and medium segment is to build ARR through the cloud-native product offerings that we've got. That is our -- one of our most critical and primary objectives that we're delivering on. That is where investments and focus is being placed. Secondly, is still to move our remaining customer base into the Sage Business Cloud. And that is still growing well in terms of cloud connected. We're still seeing good growth in cloud connected revenues through very good upsell and cross-sell off the Sage 50 base, particularly in the U.K. and North America, but also ongoing migrations. Of Sage 50 Payroll in the U.K. has given us momentum this year into cloud connected. And then across Continental Europe, France and Spain, in particular, the migrations are continuing into cloud connected to Sage 50, Sage 200. We're about 60% of the way through that transition. That is the priority of the business. Then absolutely, as you say, the other revenue line, that is about 1/3 licenses and 2/3 professional services, those are not the focus of this business anymore. And as we've seen over the last 3 years, that revenue line will continue to decline. The rate of decline will vary from quarter-to-quarter, but will be ongoing and continuing. The rate of decline was a little bit lower than what we've seen over the last 2 years in Q3, and that was, in particular -- and that was up against the Q3 comparators and the NCA discussion that I just had earlier in the call. So don't read too much into Q3. That revenue line will continue to decline. It is now, I think, if you look at the Q3 numbers, 7% or just below 7% of total revenue. And so it's really not a material driver of our results or our growth rate. And then in terms of Sage Accounting, yes, I mean, as you said, we are focusing on a sustainable balanced ARR growth of Sage accounting across the territories where it is offered to our customer base. That is picking up that growth rate. As you know, we are not focused absolutely on sub count, customer count. We're very much more focused on the professional user with a higher ACV and lower churn rates. And that is driving our strategy and go-to-market and also product upgrades. It's made a good start. The only guidance that I can give you is that it's growing faster than Intacct, that portfolio outside of Intacct is growing significantly faster, and we're very pleased with the progress to date. But as you say, we don't -- given the number of products and territories that we operate in, we're not breaking down into individual sub count or ACV by product, by territory. We'll have a very big spreadsheet if I did that.
No, that's helpful. Did you say the 1 million number there was users? Did you say that or -- just to be clear.
Yes, across the whole portfolio worldwide, that is a number that resonates in terms of our small segment.
Next question is from the line of Paul Kratz from Jefferies.
I think, first and foremost, is there any comment you can kind of make around the upsell and cross-sell component of ARR? Has that started to recover? And I guess, any color on renewal rates?The other question I also had as well is, I mean, when you look at the R&D and S&M, that's ticked up pretty meaningfully. But have you also seen an improvement, I guess, in your customer acquisition economics? And this is basically just more efficient spend driving maybe more efficient growth than you had historically. And then maybe just 2 final questions on [ Sage ]. The valuation of things that came out, trying to remember which private equity firm, looked pretty punchy. Does that maybe change your thoughts on your French business? And then finally, on NCA in the quarter. It looks like the number is almost as large as what you did in the second half of last year. Is that math correct? I mean, any qualifications, I guess, on the size of NCA in the quarter or any comparison versus prior quarters would be helpful.
Yes, thanks very much for the questions. There were 5 there, or 6, which is probably not fair on your colleagues in the analyst community. So if you don't mind, we'll take some of them, and the rest, we'll sort of take off-line, if you don't mind. I think in terms of -- you were talking about renewal rates that we've seen across the portfolio and also cross-sell and upsell. Renewal rates, if you recall, we sort of -- last year, the first half, we literally were running as per normal, at about 101% renewal rate by value across the whole portfolio. The second half, well, obviously the impact of COVID. We were running at about 97% renewal rate by value. But was -- that was consistent and flat during the second half, it wasn't deteriorating at all. And so therefore, we averaged out over the full 12 months to about 99% overall for the full year. At the first half, again, we reported 97%, so very much in line. But what I can tell you now is in Q3, year-to-date, we've seen a slight improvement in that. And we believe that, that is now beginning to head in the right direction. Really, really good question around sort of cross-sell, upsell. That is making a difference, particularly in small segments, particularly in the U.K. and also in North America. So customers who are taking the Sage Accounting line are very rapidly moving to taking on Sage HR which is the cloud-native, formerly CakeHR cloud-native HR solution. They're also taking Sage Payroll in the cloud; AutoEntry, the automated accounting service, making tax digital and submitting your tax returns digitally; and also bank payments and bank fees. All of those are cloud-native products with a very high attach rate coming off Sage Accounting. And so that's a very, very important offering in the Sage Accounting space. Sorry, just remind me of one more. What was your next question? I beg your pardon?
Yes. I think the most important question, I think, on my end is you've increased your investment in R&D and sales and marketing. And I guess, any commentary on the efficiency of growth or LTV to cap, I guess, or unit economics of the business. Has that improved?
Yes. So where we are really ramping up new customer acquisition and ramping up investment, we've seen a flattening or a slight reduction in some of the unit economics as we sort of gain territory and get a beachhead into particular customer segments. However, once that becomes a more established trend and the go-to-market is aligned exactly where we need to and we're getting benefit from the marketing campaigns that are now becoming much, much longer established, then we're seeing those unit economics improve. The one thing, and it was one of the earlier questions, I think, from Stacy is that the one thing that we will not do is invest more money or invest any money where we do not see good unit economics on a SaaS basis. And it's the classic LTV and LTV-to-CAC metrics. We will not do that for the sake of gaining new territory or gaining new customer bases. We will always do it on an economic basis.
Thank you. And that's all the time we have for questions. I will now hand the call over to Mr. Howell for closing remarks.
Yes, thank you very much, indeed, for attending today. Thank you for your good questions as ever. Absolutely the right questions off the back of the announcement, James Sandford and the IR team and I will be fully available today for any further questions that you'd like to do. Thank you.