Temenos AG

Ladies and gentlemen, welcome to the Temonos Q4 2024 Results Conference Call and Live Webcast. I would like to remind you that all participants will be listening only more than any conference is being recorded. The presentation will be followed by a Q&A session. You can register for questions at any time by pressing Start at 1 on your telephone. For operator assistance, please press Start at 0. The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Jean-Pierre Brulac, CEO. Please go ahead.

Thank you, operator. Good evening, good afternoon. Thank you for joining us for our Q4 2024 results call. So, I would like to talk through our key performance and operational highlight of the quarter before ending over to Takis. So, starting with the highlight, as a management team, we have put a lot of focus on consistent execution in the last few months. And so I was pleased that we ended the year with a strong Q4. If we look at two of our KPIs, ARR and free cash flow, we deliver strong ARR, growth of 12% year-on-year, and free cash flow growth of 25% in the quarter. We have also a strong SaaS SEV of $24.8 million, our strongest SaaS SEV quarter ever. The sales environment was stable through the quarter, and we have positive pipeline development. And we also made good progress on our strategy execution, which I will talk more about in a few minutes. We announced the sale of multifund earlier this month, and this is in line with the strategy we announced in November to be more focused in our product portfolio and R&D investment to support our growth levers. And we have issued guidance for 2025 and also updated our 2020 high targets to account for the sales of multifun. Let me start with customer success. Customer success is my number one priority, which is why we created the one global customer experience team, putting the customer really at the center of everything we do. We have made some excellent new hires, including the new Chief Delivery Officer, to strengthen our customer lifecycle. This builds on our success in 2024, where we had a total of 347 go-lives across all products, reflecting our scale and industry position. And Aldermore is a great example of our customer-centric approach. They signed a deal with Temenos for business and corporate enterprise services, all delivered as SaaS. As part of this, they will migrate multiple systems onto a single SaaS solution from Temenos. And all their more goals is to modernize the existing saving operation, to scale rapidly and increase agility. They clearly see the value of working with Temenos in order to achieve these critical objectives. I also like to share one of other great win in Europe. TEC Bank is a major bank in Romania with over 2 million customers. They chose to work with us to migrate from the legacy systems to our core banking, including our solution for payments and analytics with the goals of faster time to market, and increasing efficiency. We are delivering this project with two of our key partners in line with our partner first strategy. I was delighted that both Aldermore and CEC Bank and many other clients chose to work with Temenos in 2024. It demonstrates what I have said before, that we are highly relevant to our customers and critical to their success. We presented our new strategic plan in November, so I am sure that many of you have seen this slide already, but I wanted to remind you our three growth levers. Number one, we will expand our leadership in best of suite for tier 3 to tier 5 banks, in particular in the US and Western Europe, and this lever will be the largest contributor to our growth. Second, We will enhance our modular core solution, especially for Tier 1 and Tier 2 banks in retail and corporate. These banks are running legacy cores at very high cost and with a lot of operational risk. And they need modular and open solution to progressively modernize. Lastly, we will accelerate adjacent point solution like our digital banking capabilities for the U.S. market, payments, and compliance. We have a structured investment plan building on our strong foundation to outperform the market. So, in terms of execution, we have defined the key business enablers to deliver this strategic plan, which are focus, product, technology, and go-to-market investments, in particular in key geographies like the US, UK, and Western Europe, and investing in the customer lifecycle, which I've already talked about, and investing in our operating model. Alongside of all of this, we continue to prioritize our corporate culture to increase empowerment, accountability, and foster collaboration across the business. I would like to give an update on the progress we have made on our strategic plan and roadmap. The sale of multi-fonds was a key step to focus on our product portfolio and research and development investment in line with our strategy. We have continued to attract senior talent. I already mentioned our new chief delivery officer and Barb Morgan, our new CPTO, where you met at CMD just hire a new chief product officer with a very strong background coming from major US banks and financial technology providers. It's a first step to elevate our product and technology organization to the next level in terms of processes and skill sets. Lastly, we are updating our disclosure to reflect industry-based practice and evolving customer demand. Importantly, including new disclosure of cloud AR. This is highly relevant and strategic, given the direction the industry is moving in, as I highlighted in Capital Market Day. Many banks in the US and Western Europe in particular are developing their own in-house cloud skills to encompass proper cloud governance, taking into account security and regulation obligations. So as you can see, we are very busy, and we are absolutely focused on execution and delivering our strategic plan. And we will continue to update you on our progress. With that, I would like now to hand over to Takis to get through the financial highlight 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. We delivered strong ARR growth of 12% in June 4, which was helped by a very strong South ACV of 24.8 million, as well as healthy growth in subscriptions. ARR continues to increase as a percentage of our product revenue, now equal to 88%, and equal to 77% of our total revenue in 2024. Our transition to subscription from term license is now largely complete, and we expect the contribution from term license to be very limited going forward. I would also like to flag the strong growth in maintenance in Q4 of 12%, which again benefited from strong sales in premium maintenance, as well as the value uplift on subscription signings and renewal. Free cash flow grew 25% under our old definition or 24% on our new definition, which includes the impact of IFRS 16 leases and interest costs. We will be using this new definition going forward. In total, we generated 121 million of free cash flow under our new definition. CSOs were 152 days at quarter end, up 11 days due to the strong growth in subscription revenue in Q4. For 2025, we expect ESOs to marginally increase over the coming year and then to start declining from 2026 onwards as we will benefit from the cumulative cash flow from subscription deals sold from 2022 onwards. Lastly, we ended the year with net debt of 595 million and leveraged at 1.3 times, well within our target range of 1 to 1.5. And we have announced a dividend of 133 C for 2024, up 8% on last year to be voted on at the AGM. Moving to slide 15, I would like to flag the new cloud ARR disclosure we are introducing, which Jean-Pierre mentioned earlier. This includes ARR from both SAS contracts as well as subscription contracts where the client is using cloud infrastructure to run the software. This is an important metric as it reflects client demand. We see growing appetite for use of hybrid and public cloud. We spend on public cloud expected to grow at around 16% Cogger over the next few years. Therefore, Cloud ARR will give an insight into the demand for cloud infrastructure across our client base. We expect Cloud ARR to grow at a percentage of total ARR in 2025, and to continue increasing in the mix over the following years. Looking at our services revenue, this continued to decline in line with our partner-first strategy, but there was a strong improvement in the services profitability in the quarter. I would expect service revenues to grow low single digits in 2025. Looking at our cost base, operating costs were up 1% in the quarter, as we benefited from the efficiency program we started in H2 2014. This masks the underlying acceleration in investment in R&D and sales and marketing. We have not seen the full P&L impact of our investment program in 2024, and these investments will become more visible as the cost base continues to grow in 2025. Lastly, we delivered strong growth in our EBIT margin, up three percentage points for the full year to reach 34%. On slide 16, we have like-for-like revenues and costs adjusting for the impact of M&A and ethics. The figures are all organic and therefore in line with our constant currency growth rate. As I mentioned, services margin continues to improve with costs down 11% in the quarter and 7% for the full year. Product-related costs, including services, were up 4% in the quarter as we have started to ramp investment in R&D and sales and marketing. and this will continue under our investment plans for 2025. As a reminder, we have flagged at the CMD we expected to invest an incremental 30 to 40 million in total in 2025. I would also like to flag that our net capitalized development costs declined significantly in 2024 to 10 million, down from 18 million in 2023. Looking at ethics, there was roughly a 2.5 million headwind on EBIT largely due to euro weakness against the dollar, impacting revenue and some impact from hedging. On slide 17, net profit was up 44% in the quarter versus EBIT growth of 18%, with the outperformance mostly due to a one-off tax benefit of 15 million. EPS was similarly up 47% in the quarter. The underlying tax rate was 20.7%, within the guidance range of 20% to 22%. For 2025, we expect a similar tax benefit. So our expected tax rate for 2025 is 15% to 17%. And the normalized underlying tax rate excluding the one of benefit is 19% to 21%. Moving to slide 18, we have the changes to group liquidity in 2024. We generated 391 million of operating cash. paid $97 million of dividends and bought back $227 million worth of treasury shares. We also used our debt facilities to repay a $150 million Swissie bond in April 2024. We ended the quarter with $114 million of financial balance sheets and net borrowings of $727 million. Our leverage stood at 1.3 times, well within our target range of 1 to 1.5 times, and without M&A, share buyback will continue to be leveraged further in 2025. In conclusion, we have ample flexibility and optionality to do further buybacks. Moving to slide 19, I'm sure you all saw the sale of multi-funds we announced earlier this month for an EV of around 400 million, including an earn-out. we expect the deal to close in Q2 2025. This aligns with our strategy to simplify our product portfolio and focus R&D investments. In 2024, Multifunds contributed around 40 million to total software licensing and 50 million of EBIT, keeping in mind it has a solid maintenance revenue base as well as some service revenues. We have adjusted our 2025 guidance, 2028 target, and 2024 performer figures to exclude the contribution from multifund. Moving now to slide 20, I would like to briefly discuss the change in our revenue disclosure. As I mentioned earlier, we have introduced new disclosure on Cloud ARR to give greater transparency on the progress we are making on Cloud. We are also changing our revenue line items to reflect changes demand, and industry best practice. We are replacing total software licensing at niche parts with a single line called subscription and SaaS, which brings our guidance metrics and disclosure in line with global software failures. We expect term license to continue trending down to around 20 to 30 million per annum as a steady state, so the majority of the revenue in this line item will be from subscription and SaaS contracts. In slide 21, we have our guidance for 2025, which is non-IFRS and in constant currency, except GPS and free cash flow, which are reported. Both the 2025 guidance and the 2024 formal numbers exclude any contribution from multifunds, and free cash flow is, of course, under our new definition, including IFRS 16 leases and interest costs. We are guiding for ARR growth of at least 12%, and subscription and sales growth of 5%. We expect EBIT growth of at least 5% and EPS growth of 7% to 9%. And we expect free cash flow growth of at least 12%. And lastly, on slide 22, we have our 2028 targets, which we have updated for the sale of multifunds. It is important to note that the implied covers have not changed from the targets we announced at the CMD in November. We now expect ARR to be more than $1.2 billion, implying a cover of 13%, EBIT to reach around $450 million, implying a cover of 10%, and free cash flow now to reach about $400 million at a cover of 16%. With that operator, please can we open the call for questions.