Looking back on 2020, it has been an exceptional year in every sense of the word. No one could have predicted the impact of the pandemic, both socially and economically. And I am acutely aware of the many losses that so many people and communities have suffered over the last 12 months. I am extremely proud of the way in which Temenos and all Temenosians responded – with commitment, dedication and empathy – supporting each other, our clients and partners through these unprecedented times. Through the crisis, our employees demonstrated our core values of Temenosity. These are tenacity, velocity, responsibility, authenticity and a constant focus on community. This enabled us to make great progress in 2020, despite the crisis, and emerge even stronger.
We entered the pandemic in a very strong position, with record sales and profit in 2019 providing significant momentum at the start of 2020. We also benefit from a large recurring revenue base, which means that a significant portion of our profit for the year was already locked in. When the global financial impact of the pandemic became clear in the second quarter, we launched a solidarity program, with the Executive Committee and Leadership team taking salary reductions. 85% of the global workforce also voluntarily agreed to a salary reduction for 2020, to protect the company’s ability to invest in key areas, in particular Research and Development. This commitment from our employees demonstrates the dedication to the success of Temenos among our workforce.
Over Temenos’ 27-year history, our business model has demonstrated many times that it can withstand crises and emerge even stronger which we showed again in 2020. We did this by focusing on our unique value proposition of packaged software, industry-leading levels of R&D, leading functionality and technology and a broader ecosystem of partners. We won a large number of new clients globally, moved all our implementations to remote methodologies and made excellent progress with our product roadmap. In addition, we saw a dramatic acceleration in demand for SaaS and cloud. This was something we were well prepared for, through a decade of investment in our SaaS and cloud capabilities and being the first to run a core banking client in the cloud in 2011.
Covid-19 has significantly accelerated the demand for digitization in banking. There has been a massive increase in use of digital channels by end-customers, which has in turn increased the pressure on banks to invest in their digital capabilities. This has only added to the pressures on banks that existed before the pandemic, including costs, regulation and the move to Open Banking. Our addressable market reached USD 63 billion in 2020, of which only USD 17 billion is spent with third party software vendors. The third party spend is expected to grow at a CAGR of 8% per annum, and within this, the spend on SaaS is expected to grow at 25% per annum versus on-premise spend which is expected to grow at 6%. At this rate of growth, SaaS will constitute 30% of overall spend by 2025. Temenos clearly continues to benefit from a large and growing market, underpinned by sustainable longer term structural growth trends.
Within this market, we have been able to maintain our high win rates through 2020 and have continued to take market share across our key products and geographies. The on-premise competitive environment has remained relatively stable, and in the SaaS core banking space we have seen the emergence of a number of new vendors. With the significant investments we have made in our SaaS and cloud capabilities, we have even higher win rates in SaaS than our on-premise business. Through the pandemic, our pipeline of deals with existing customers was more robust than deals with new customers, contributing 72% of software licensing in the year. In the early stages of the pandemic, deals with larger banks slowed somewhat more than with smaller institutions. However, we saw spending with Tier 1 and 2 banks return in the third and fourth quarter, with these banks contributing 44% of total software licensing in the fourth quarter and 36% of total software licensing for the full year.
We maintained our very strong rankings and awards from third party analysts through 2020. IBS Intelligence Sales League Table has ranked us the #1 core banking vendor for the 15th time, as well as the #1 best-selling solution for digital banking and channels, payments, and risk and compliance. Similarly, Forrester recognized us the top global power seller for new-name clients for the 14th consecutive year. We were the only global power seller in the ranking, with a 30% increase in deals. We also continue to make significant steps forward in our ESG strategy which is reflected by our ongoing inclusion in three different sustainability indices, FTSE4Good, Dow Jones Sustainability Index and the Swiss Sustainability Index.
Through the pandemic, we continued to make significant investments in our business to emerge even stronger. It is through our focus on R&D and innovation that we are able to retain our market leading position, attract new talent, win new customers and expand within our existing customers. We continue to lead the industry in R&D, spending more than 20% of our revenue on product and technology every year.
Sales – a strong recovery in the second half of 2020
The pandemic had a significant impact on sales in the first two quarters of 2020. The business environment was strong until early March, at which point the global acceleration of the pandemic caused significant disruption. Banks’ initial response was to focus on business continuity, with a focus on more short-term, discreet projects with immediate benefits during the crisis. This created an initial slow down in bank IT spend for larger capex projects. In the second quarter, bank IT capex focused on client needs. There was an emphasis on digital channels, AI and financial crime mitigation platforms to address the exponential increase in demand for digital and the risks that comes with this. We reached a turning point in the third quarter, with banks embarking on strategic IT investment and refocusing on infrastructure and operational IT spend. In particular, Covid-19 accelerated demand for SaaS and cloud, to increase resilience and support remote operations going forward.
From a regional perspective, Transact demand in the US was driven by innovative banks looking for best-in-class solutions, as well as challenger banks and fintechs buying front and back office software. In Europe, we saw strong improvement in demand – in the fourth quarter in particular – with clients looking to address the massive growth in demand for digital by investing in front and back office platforms. In APAC, we saw strong demand for Infinity from both existing banks and new entrants, as well as increasing demand from neo-banks. Lastly, in MEA, demand for Transact was largely driven by new entrants and digital banks.
We had a very strong performance in our SaaS business in the year, with SaaS revenue up 44% and SaaS ACV up 65%. The US market was the strongest contributor of SaaS deals in 2020. Our modern technology and deep banking expertise resonates very well with US challenger banks and fintechs. Banks understand the operational and cost benefits to be gained from using SaaS and cloud, and there is increasing regulatory acceptance globally. Our clients recognize that using Temenos SaaS allows for faster updates, lower infrastructure costs, elastic scaling and increased resilience. The economics offered by SaaS solutions are opening the banking market to new entrants. This includes challenger banks and fintechs which provides us with a significant and largely incremental opportunity.
Key strategic initiatives to drive growth across SaaS and licences
At our Capital Markets Day in February 2021, we outlined our strategic initiatives to achieve our targets for 2025 of more than USD 1 billion of bookings, expanding our non-IFRS EBIT margin to at least 41% and generating more than USD 600 million of free cash flow. These focus on four key areas.
Profitable SaaS acceleration
We have invested in our SaaS and cloud capabilities for the last decade, and will capture the accelerating demand with our SaaS-ready, cloud-native products. We will also leverage our global sales teams with one sales organization selling our product – whether on-premise, cloud or SaaS. We will continue to invest in our sales capabilities to maintain our high win rates, as well as investing in our SaaS operations to drive automation and efficiency at scale. This will allow Temenos to achieve profitable SaaS growth.
Continued market leadership across all our growth engines
I am very proud of our market leadership position across all our product growth engines which we have consistently maintained for years. We are able to do this through our focus on R&D and innovation, with rich product and technology roadmaps led by our world class product directors and R&D teams. This keeps Temenos and our clients at the forefront of our industry. This year in particular, we have accelerated our investment in SaaS and cloud and continued to expand our Microservices capabilities.
Accelerating our North America growth
North America is the largest market globally, and we have made significant investments in the last five years to build our presence. North America was our largest region in 2020 and where we signed our largest ever ACV contract which was signed in the third quarter. We have a very sizeable opportunity for our products across many client segments in the US. We plan to accelerate our growth further by investing in people, in particular our sales leadership across client segments. We are strengthening our go-to-market strategy with new strategic partnerships.
We are building a very strong US SaaS pipeline, which is the largest contributor to our SaaS pipeline globally. We are investing in our US-specific SaaS offering, specifically around our customer experience and we are scaling our US cloud operations.
Game-changing Global Strategic Partnerships
The last strategic initiative is our game-changing strategic partnerships. Temenos has signed two groundbreaking partnerships in 2020, with Salesforce and DXC. In the partnership with Salesforce, the world’s number one CRM company, we are taking the transactional strengths of Temenos Infinity and the relationship capabilities of Salesforce to create a new digital workspace. This will let banks reimagine the way they engage their customers and employees. The aim is for this to be the number one Digital Banking platform for all banking clients.
The second game-changing partnership we have announced is with DXC. This will enable DXC’s large bank customers to accelerate their digital transformation on Temenos software. The partnership will combine the implementation and integration strengths of DXC with the power of Temenos’ technology and functionality. The partnership opens up a new channel to market for Temenos with a proven transformation partner. It will also accelerate our penetration in the large banks segment, particularly in the US market.
Our unique value proposition
Temenos is uniquely placed to meet the demands of our clients – across all tiers and business models – through our unique value proposition.
Firstly, banking is all we do. We have deep domain expertise, unrivalled in our market, which means we understand our clients’ business and build our product and technology specifically to meet their needs in a rapidly evolving market. Temenos has the leading functionality, built on 27 years of focus on one sector, and we combine this with extensive localization capabilities for our clients in 150 countries. We have game-changing technology – our platforms are cloud native, cloudagnostic and multi-cloud. That gives our clients efficiency, scalability and freedom to choose how and where they run our software. Our technology is API first, with Artificial Intelligence embedded across the platform. And crucially, in our regulated industry, Temenos AI is explainable. Our packaged products have a single code base, which means all our clients are running on the same platform and they can all benefit from our innovation and R&D, which is the highest in the industry. Finally, Temenos can scale through our incredible ecosystem of technology and implementation partners. This means our clients can chose who they work with when implementing and running our software.
Together, this makes us the leader in the market, with high win rates, high retention and over 3,000 clients across the globe.
I am incredibly proud of how Temenos and all Temenosians have responded to the crises in 2020. By focusing on our clients, supporting them through the crisis, rapidly moving to remote implementations and driving our R&D roadmap forward, we have emerged even stronger. With clear strategic initiatives in place, I am confident we will be able to deliver our 2025 targets. We will continue to be at the very forefront of our market.