Temenos AG

Welcome to the Temenos Q2 2024 Results Conference Call and Live Webcast. I would like to remind you that these plans will be listened on in mode and the conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing star and 1 on your telephone. For operator assistance, please press star and 0. The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Jean-Pierre Brulard, CEO. Please go ahead.

Thank you, operator, and good evening, good afternoon, and thank you all for joining us for our Q2 2024 results. My first call as the CEO of Tebenos, and let me tell you that it's both an honor and privilege to be with you today. So starting with the highlight of the quarter, we have seen a good incremental improvement versus Q1 across most of our QPI, And even more importantly, our customers reaffirm their confidence in Temenos with all the delayed deals from Q1 to Q2, 100%, and as well as strong attendance at the Temenos Community Forum early May. In this context, looking at our two most important KPIs, our ARR grew 12% and free cash flow grew 16% in the quarter, which clearly shows the resilience of the business that we have as we move to a recurring revenue model. This quarter also, we announced the launch of Temenos SaaS Foundation, our next-gen SaaS platform for banking, which we will detail later on. However, we didn't catch up the two months lost in the most sales campaign due to the short seller report earlier this year, with that clearly impacted the quarter. So given this HO1 performance, we have issued revised guidance for the years. And importantly as well, this guidance assumes a return to growth while de-risking the second half of the year. So having said that, I would like to take a minute to briefly introduce myself as well. I joined Temenos at the start of May, and have relocated myself to Zurich for this role. I have spent more than 30 years in the software industry, and I would like to share two key experiences that I believe are particularly relevant to this new chapter of Temenos. First of all, as CRO of VMware, a $13 billion revenue company, where I spent the last 14 years between London and Silicon Valley, I led the business transformation of VMware for a pure on-premise business to a SaaS and subscription. And prior to that, I was the EMEA President of Business Subject, where I learned the challenges for a non-US company on the global stage. And the software company I've served, Financial Services, was my first industry focus, and it's a privilege as well of helping our banking customers to run and transform their business. So coming from my first 80 days, it has been an exciting three months at Temenos for me, a listening and learning tour. And I have the pleasure and the privilege of meeting many of our clients and partners, and more importantly, hundreds of our employees in our offices around the world, from London to Paris and Amsterdam to New York, And lastly, in India, in Chennai and Bangalore. One of the first events I also attended as a CEO was the Temenos Community Forum in Dublin. As you know, it's our annual ecosystem event with clients and partners coming together to share success stories and learn about our latest innovation. Clearly speaking, I was impressed to see over 1,400 people with the higher attendance, higher than last year. And for me, that really shows our clients and partners reaffirming their commitment to Temenos. From this listening and learning tour, I would like to share my initial impression with you. And it's clear to me that we are servicing a large and growing market. With clients, they are under increasing pressure. And from my client meeting, I can see we have a strong customer relationship where we are a trusted partner, really at the heart of the operation. And the love and loyalty of the customer is something you cannot buy. And to me, this gives us a strong foundation to continue serving them and also create upsell and cross-sell opportunities. And despite the uncertainty, Driven by recent events, our level of attrition remains very low, and I've been impressed by the level of commitment and passion of our employees for the company and our clients. Last but not least, let me share with you from my past experience in the software industry, the successful software companies always, always combine two major ingredients, customer centricity and innovation. And I strongly believe from my customer meetings that Temenos has this winning combination of leading functionalities and the latest technology that makes me very confident for the future. So let's start with customer centricity by sharing with you two proof points. The first is the number of customers going live in our product in Q2 alone. We have 101 go live, up from 62 in Q1 this year. This includes customer going live for the very first time, customer going live on additional modules where we upsell or cross-sell to them, and customers upgrading to the latest version of our products. The second proof point, it was a testimony from Bill Bank of International of Luxembourg. This bank relies on Temenos core, payments, and wealth front office. This is a great example of upsell and cross-sell, as Bill was already a core banking customer for Temenos, and they have adopted much more core modules and as well other products from Temenos, like payments and wealth. And by partnering with Temenos, Bill has achieved greater flexibility to respond to regulatory and commercial change, and as well, operational efficiency and scalability to allow them to onboard high-volume clients. And I do believe, at the first glance, in general, we have many untapped upsell and cross-sell opportunities in our tool base, and I've specifically asked for our sales force to focus on it. Equally important to the customer base, we need to win new logos. And our next-gen SaaS platform that we launch at TCF will be an important asset to achieve this goal. And in a few words, Temenos SaaS Foundation is a single portal to consume SaaS solution with operational automation and management tools. And as you can see here, Temenos SaaS Foundation is a single platform and portal based on hyperscalers like Azure and AWS, and take out the complexity of the cloud architecture. And it's not only an announcement, as we have already a client live on Temenos SaaS Foundation, which is the leading tier one bank in Europe. We have gone live for its international operation. To allow customers to adapt and go live very quickly, we have also released our next generation enterprise services on top of Temenos SaaS Foundation. And these enterprise services are fully integrated and packaged front to back capabilities from digital to core with pre-configured banking products and business processes for specific banking verticals like retail, corporate, and wealth. I am also excited about the strength of our executive leadership team, which has been recently reinforced through internal promotion and UIS. Starting with internal promotion, Will Moroney, which was our president of international business, has been promoted to CRO. with responsibility for global revenue. Will is bringing over 25 years of sales and leadership experience and joined Temenos in 2020 from Finastra. Rodrigo Silva has been promoted to President Americas with responsibility for the P&L and growing our business in North and South America. Rodrigo joined Temenos two years ago managing director, and more recently has been running sales for the America. And prior to this, Rodrigo spent over 20 years at Pfizer, holding many senior sales and management roles. And we have also made two senior hiring, both in the U.S., in the West Coast. Isabelle Gibbs joined us as CMO, bringing over a decade of SaaS experience, driving go-to-market growth strategy and overseeing product marketing for global SaaS organizations like Salesforce. And Monty Bhatia joined us as EVP of Global Alliances on Partner Ecosystem. And as well, Monty drives our partner strategy to accelerate the growth of the company's partner ecosystem. He has over 30 years of industry experience in management and commercial leadership roles, in software and technology companies, including AWS and Deloitte. Lastly, I would like to outline our three main priorities for the second half of the year. And let me start with cultural leadership, absolutely indispensable to open this new chapter of Temenos. Second priority is the assessment of our product and technology critical to defining our strategy going forward. And based on these two streams, we are working on our strategic and financial plan that we will share at our Capital Market Days on the 12th November, just after the US election. Even prior to that, to accelerate our presence in the US and Western Europe markets, we are making immediate incremental investment in go-to-market in H2. With that, I would like to hand over to Takis, our CFO, to take us through the other business and financial highlight of the quarter.

Thank you, Jean-Pierre. I'll start with an overview of the quarterly financials on slide 16. All figures are non-IFRS and in constant currency unless otherwise stated. ARR grew a healthy 12% this quarter to reach 742 million and also returned to the normal pattern of sequential growth after the small decline in Q124. All delayed deals from Q124 signed in Q2. This is an important data point as it demonstrates our clients and prospects have fully re-engaged with us after the independent report was published. We also saw our sales cycles normalize in terms of rate of progress, and we saw growth in demand for both core banking and digital in Q2-24. However, many of our deals were impacted by a two-month earlier delay in the year. As we said, the sales environment remained stable. The growth in ARR was driven by all our three recurring revenue lines, subscription, sales, and maintenance. Subscription revenue was $39 million in the quarter, up double-dated year-on-year. SaaS revenue grew 8%, but declined sequentially as we had flagged at the Q124 results due to the temporary impact of elevated downsell and churn in the first quarter, which have now normalized. We signed $9.4 million of SaaS ACV, nearly double that of Q1 2024, and this included a new logo win with Heaven Tree Bank in Canada. This SaaS ACV will drive sequential growth in SaaS revenue again in Q3, Q4, and into 2025. We have a good SaaS ACV pipeline, and I would expect it to turn into growth in Q3 2024. Maintenance was again a bright spot in Q2 24, growing 11% and driven by sales of extended and premium maintenance. And I expect maintenance to grow high single digit in Q3 and Q4 to reach around 10% growth for the full year. The shift of sales commissions to ARR at the start of the year is driving the desired behavior in our sales force to focus on recurring revenues. Total revenue grew 5% in the quarter and EBIT was again up 7%, benefiting from lower than expected variable costs across commissions, bonus accruals, travel, and marketing. Some of this is expected to come back in H224 when we return to stronger growth along with new hires, although this will only have a small impact on H224 costs given the phasing. EBIT margin expanded one percentage point to 37.4% in Q2-24. Cash flows remained strong in Q2, with 73 million of free cash flow generated, up 16%, and we had further reduction in our DSOs, which were down to 133 days, again held by good cash collection and a reduction in services DSOs. I still expect DSOs to decline year-on-year as previously guided. Looking at capital allocation and the balance sheet, we launched 200 million Swiss share buyback in June and we have so far bought back shares worth 110 million. We ended the quarter with 563 million of net debt and leveraged to that 1.4 times, slightly below our target of 1.5 to 2 times. I expect our leverage to be towards the lower end of our target range by year end after the share buyback and assume no M&A. Moving to slide 17, I was pleased that subscription grew 10% despite the delays in sales processes earlier this year. On an LTM basis, all product-related revenue lines such as subscription, SaaS, total software licensing, and maintenance remained on a solid trajectory and also demonstrating the health of the business despite the quarterly volatility seen in H124 due to recent events. Moving to slide 18, we have like-for-like revenues and costs adjusting for the impact of M&A and FX. The figures are all organic and therefore in line with our constant currency growth rates. On services costs, we were down another 5%, and the margin in our services business continues to improve as we expected. Product-related costs in the quarter were up 6%, again, from our ongoing investments, go-to-market in SaaS, cloud, and hiring across the business. Looking at ethics, it was a similar trend to Q1, with a stronger pound sterling, a slight headwind on costs, but offset by a weaker Indian rupee. Overall, including hedging, there was no impact from FX on EBIT this quarter. As Jean-Pierre elaborated, we are making continued investments in our go-to-market, but we are also investing in other areas such as cloud and sales. On slide 19, net profit was up 11% ahead of EBIT, with lower net financing charges offsetting higher tax charges. EPS for the quarter was up 8%. On slide 20, our LTM cash conversion was 121%, well above our target. Turning to slide 21, the main movement in our group liquidity was generating 97 million of operating cash, repayment in April, and starting our share buyback. We ended the quarter with 194 million of cash on balance sheet and net borrowings of 572 million. Our leverage is at 1.4 times, and I expect our leverage to be towards the lower end of our target range by year end after the share buyback and assuming no M&A. And lastly, on slide 22, we have revised our 2024 guidance, which is non-IFRS and in constant currency. Our progress on sales campaigns in Q2 24 showed us that it is increasingly unlikely that we will catch up everything by year end. So we have issued this revised guidance, which assumes return to growth 8% to 10% in the second half for total software licensing, while at the same time de-risking the second half of the year. We're waiting for ARR of about 13%, down from about 15%, and now expect total software licensing to grow 3% to 6% instead of 7% to 10%. We still expect EBIT to grow 7% to 9%, which gives us ample headroom to fund the incremental investments in go-to-market Jean-Pierre has talked about. We are going for EPS to grow 6% to 8% and our free cash flow to grow at least 16%. Our tax rate is expected to remain in the 20% to 22% range. We have put the EBIT and free cash flow bridges into the appendix for your reference. A couple of things I would highlight for H224. We expect Q3 to be a bit better than Q2 for total software licensing, given the delays we have seen from H1, which is not our normal seasonality for TSL. Our cost evolution will be a similar case to last year, plus a few million more. And in terms of cash, We will be paying all of the invoices related to the independent investigation in Q3, so our free cash flow growth rate will be lower in Q3, which is why we have kept our 2024 guidance for free cash flow of at least 16% growth unchanged. We will be revisiting our mid-term targets at the capital markets day in November as well. With that, operator, please can we open the call for questions?