Temenos AG

Ladies and gentlemen, welcome to the Temenos Q3 2024 Results Conference Call and Live Webcast. I would like to remind you that all participants will be listened on remote 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 Broulard, CEO. Please go ahead.

Thank you, operator, and good evening, good afternoon. Thank you all for joining us today for our Q3 2024 results call. And I would like to first talk through our key performance and operation highlights for the quarter before handing over to Takis. So starting with the highlight of Q3, I was pleased that we saw continued engagement from customers for the quarter. Sales cycles already normalized in Q2 and the sales environment was stable across all our regions. We saw strong demand from our install base in Q3, as well as signing a good number of new clients. However, we did have some sales execution issue in our Middle East Africa region, which resulted in total software licensing of revenue of $96 million, a bit below consensus expectation. We have carried out a deep review of our sales pipeline and addressed the sales leadership issue with our CRO, stepping in to support the Middle East African region through Q4 as we look to strengthen our sales team. This issue was limited to Middle East Africa region and we have already taken the necessary action to address it. On the point of leadership, I am pleased on the good progress we are making to attract talent. In particular, I am pleased Bob Morgan has joined our Chief Product and Technology Officer, and we will continue to invest on new talent across the business as we execute our investment plan. Looking at other KPIs, ARR reached $761 million in Q3, up 9% year-over-year. Free cash flow was down 21%. However, adjusting one-off payments we made relative to the independent investigation, free cash flow grew a very healthy 26% in the quarter. We have issued slightly revised guidance for FY24 and guidance for Q4, taking a conservative view on our Q4 pipeline. However, importantly, our EBIT and EPS guidance are unchanged. So, as customer success, we are very focused on our customer success. In Q3, we had another 61 go-lives across our products and now reached 224 go-lives in the first three quarters of the year. And combining the effort made our professional services team and partners, we continue our strong success in helping our customers modernize. To demonstrate our customer-centric approach, I'd like to focus on one particular customer case study from Q3. Midwest One Bank is a regional bank in the US with operation across four states. They went live in Q3 with Temenos digital onboarding, consuming it as a SaaS on AWS. And Midwest One wanted to improve and streamline their customer digital experience and enhance their own operation efficiency. Having an highly scalable platform was really important for them. So they chose Temenos to achieve their operation and business goal. And using Temenos for onboarding and origination, our client has already seen a significant improvement in speed, performance, and customer engagement through their digital channels, with customers completing an application in an average of two minutes. We are very proud to work with Midwest One as we look to expand our presence in the U.S. banking market. I also like to share a deal with this quarter from the Middle East Africa region. Boubouyan Bank, is the second largest Islamic bank in Kuwait. They have selected Temenos to modernize their core banking. And they will migrate to Temenos core banking across their retail, corporate, and wealth operations. And Boubian has a vision to become one of the top Islamic banks in the world with innovative products and services. It's a testimony of the strength of our core banking product that they have chose to work with Temenos. And I'm confident we have a strong competitive position in the Middle East and Africa region where we will continue to invest to capture this fast-growing market. I will give more details on how we will continue to increase our market share across geographies in the strategy plan we will present at our Capital Market Day in November 12. This market leading position and competitive strength is also recognized by the latest industry analyst reports. We were once again ranking first in the IBS SEDS League tables for core banking, as well as being ranking first in many other categories, including digital channel, NEO and shallow banks, and retail payments. IDC also published the review of core banking vendors across North America, EMEA and APAC, and Temenos continues to be a leader in every single market. We have continued to reinforce the strength of our leadership team this quarter with the hiring of Bart Morgan as our new Chief Product and Technology Officer. And Barb is a fantastic hire for Temenos, bringing 25 years of experience leading global product development organization with particular expertise in banking and financial services. She joined us from London Stock Exchange Group. And prior to this, she served as Chief Technology Development Officer at FIS, leading their global payments and banking product engineering. Barb has a strong background in integrating AI technology, building high-performance teams, and launching transformative products, working closely with sales operations to deliver growth. I'm delighted to have her already on board and look forward to introducing her as a CMD next November 12. Lastly, I would like to give an update on our priorities going forward. We have defined our senior leadership team, which is the 40 top leaders below executive committee, and they are already actively contributing to our strategic plan, and they will be key to driving cultural change across the organization. We have been attracting new talent, in particular in sales, We have started to execute our investment plan with Aria in the U.S. and continue to recruit sales in both U.S. and Western Europe in particular. In terms of go-to-market, in addition to push ahead with new Aria, we are laser-focused on our operational excellence. And we are starting our efficiency program to reduce management layers across the organization. For product and technology, with our new leadership on board, we are reviewing our product and technology roadmap to simplify it and define the key areas of innovation we want to focus on. And even more importantly, we have defined our strategic and operational plan and the roadmap for executing this. We will share that at Capital Market Day on November 12th. Now, I would like to hand over to Takis to take through the other business and financial highlights of the quarter.

Thank you, Jean-Pierre. On slide 14, I'll start with an overview of the quarterly financials. All figures are non-IFRS and in constant currency unless otherwise stated. While our software licensing revenue was impacted by sales execution issues, our ARR continued to grow, reaching 761 million at the end of Q3 24, up 9% year-on-year. ARR is now equal to 85% of our product revenue, or 75% of total revenue over the last 12 months. It shows the amount of progress we have made in moving to a recurring revenue business model. Despite the quarterly P&L volatility, we have very good visibility on our cash flow growth over the coming 12 months from our strong ARR. South ACV this quarter was 9.4 million and included two new logo wins. We expect sizable deals to sign soon and therefore to drive strong growth in Q4 South ACV. Maintenance continues a strong growth trajectory, again up 10% in Q3-24. I expect maintenance growth of around 8% to 9% in Q4-24 as we start to lapse strong comparatives. Total revenue grew 4% for the quarter, and EBIT was particularly strong, up 19%, again benefiting from lower variable costs across commissions and bonuses, some of which will revert in Q4-24. We have been expanding our sales coverage since July, with a particular focus on sales in the US and Western Europe, but these new hires from Q3 and Q4 will only have a limited impact on costs this year. We generated 22 million of free cash flow this quarter, which was down 21% year-on-year, as we absorbed the full impact of the independent investigation in our Q3 cash flow. However, including this impact, our return flow will have grown 26% this quarter and 21% year-to-date. DSOs were 134 days at quarter-end, and I now expect DSOs to be slightly higher by year-end than in 2023 due to the change in revenue mix we have seen this year, with greater contribution from subscription licenses and lower contribution from sales. Looking at capital allocation and the balance sheet, we completed our Swiss 200 million share buyback in September, purchasing 4.3% of the registered shares. These shares will be canceled next year post our AGM. We ended the quarter with 775 million of net debt leveraged at 1.8 times, and they should trend down by year and towards the lower end of our target range of 1.5 to 2 times. Moving to slide 15, it is worth noting that subscription grew 17% this quarter, even with the sales execution issues we faced, with sales into our installed phase particularly strong in the quarter. Operating costs were down 1% in the quarter, despite the annual salary increases in July and sales hiring. As we have started to benefit from some of the cost savings, we are realizing from our pre-efficiency program and with lower variable costs in the quarter. EBIT grew 19% with the EBIT margin expanding by 4 percentage points. On slide 16, 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 rate. Our services costs were down another 9% and our services margin continued to improve. Product costs were up only 1% as we started to benefit from our efficiencies program while continuing to invest in key areas around sales, product and technology. We will continue hiring in Q4 and will give more details on our investment plan as well as efficiencies at the Capital Markets Day in November. For Q4, as an indication, I'd expect our cost base to increase by more than 30 million sequentially, driven by the usual seasonality and with higher commissions and variable costs in particular driving the increase. I would also like to flag that our net capitalized development costs have continued to decline, coming down to 1.3 million in Q3 24. we now expect net capitalized development costs to be around 12 million for the year, down from 18 million on 2023. Looking at FX, there was almost zero impact on EBIT this quarter. On slide 17, net profit was up 24% ahead of EBIT, with higher tax charges offset by FX gains. EPS was similarly up 25% in the quarter. In slide 18, our LTM cash conversion was 150% well above our target and we expect a strong cash quarter into fall as usual. Moving to slide 19, the main impact on liquidity this quarter was the share buyback. We generated 52 million of operating cash and bought back 187 million worth of shares in the quarter. We ended the quarter with 107 million of cash on balance sheet and net borrowings of $798 million. Our leverage is at 1.8 times, and I expect our leverage to be towards the lower end of our target range by year-end. We do not currently plan to launch another share buyback this year, but given our strong cash generation and assuming no acquisitions, we would have scope for further buybacks next year. And lastly, on slide 20, we have given some guidance for Q4-24 and revised our 2024 guidance, which are non-IFRS and in constant currency. I would note that our EBIT and EPS guidance for the full year has not changed. Given the same execution issues in Q3, we have taken a more conservative view on our Q4 guidelines. total software licensing growth of about 5%. For the full year, we are guiding for ARR growth of 11% to 12%, down from about 13%, and now expect flattish total software licensing growth instead of 3% to 6%. We still expect EBIT to grow 7% to 9%, which gives us plenty of headroom to make our planned investments this year, while also benefiting from our efficiencies program, which we started in Q3. and we still expect EPS to grow 6-8%. Lastly, we now expect pre-cash flows to grow at least 12%, which takes into account the 5 percentage points and wills from the independent investigation payments and the lower forecast total software licensing growth. Our tax raise is expected to remain in the 20-22% range. As previously stated, we will be revisiting our mid-term targets at the Capital Market Day in November. With that, operator, please can reopen the call for questions.