Driving future growth
Thoughts on our performance in 2022
2022 has been an unusual year in our 29-year history. We started the year with hope that the previous two years of operating within a global pandemic were behind us and that we would begin to return to something resembling a more normalized operating environment. What resulted was very different and more reminiscent of some other unusual years in our operating history. The energy crisis triggered by Russia’s invasion of Ukraine, and the subsequent rise in inflation we had indeed not expected and neither had our clients. In addition, in the first half of the year at least, we saw a continuation of the trend of a significant elevation in people across the technology sector moving jobs either within the sector or seeking more flexible ways of working in technology and other sectors. We saw less of this trend in the second half of the year as macroeconomic uncertainty began to cool some of the heat in the technology job market.
Clearly there was a fundamental change in the entire technology market in 2022, not just for Temenos and the banking technology space. And within this context, I am very proud of the way all Temenosians rallied together to deliver for our clients across the globe. We have always known our people are the key to our success and this was never more true than in 2022. Since the day we started Temenos we had a strong set of values which are our true north. And in years like 2022, it is these values that see us through the year and enable us to keep moving forward.
Despite the unusual 2022, the fundamentals of our business are intact. We benefit from a large and growing opportunity, with an estimated USD 23 billion serviceable addressable market in 3rd party banking software spend, which is expected to grow at 11% CAGR to reach around USD 34 billion by 2026.
Bank IT spend is expected to increase in line with banks’ revenue as the macroeconomic turmoil of the last couple of years stabilizes, with digital transformation of both front and back-office systems top of mind for banking executives.
Within our market, Temenos remains a clear industry leader. We have remained true to our business principles of selling packaged, upgradeable software with state-of-the-art technology, on a single code and configuration base. We continue to invest in R&D and innovation through the cycle to pull further ahead of the competition and we are investing in Sales and Marketing to capture the growing demand in our market. This has enabled us to sustain high win rates, both across our traditional competitors and across the so-called neo-vendors which have entered the market in the last five to ten years.
Sound corporate governance must include alignment between corporate performance and global responsibility. We are leading the market globally in terms of Environmental, Social and Governance (ESG), having embedded ESG into our operations and product offering. Top ESG global indices and ratings, such as DJSI (Top in our category globally), S&P (Gold distinction), FTSE4Good (Top 10%), CDP (Leadership band), ISS (Prime), MSCI AAA (Top), Sustainalytics (Top-rated ESG performer), Bloomberg Gender Equality Index (Top performer) and our science-based targets are our credentials. The fundamental trend in our business towards SaaS and cloud adoption focuses on building a sustainable business for our customers, a true climate-related business opportunity, with a shift to 32% carbon efficient, greener Temenos technology and up to 95% carbon efficient, resilient service delivery to our customers with the hyperscalers. We are pioneering within our industry, helping our clients become sustainable and inclusive organizations, as we have the technical and ESG know how to combine digital transformation with sustainability.
Examining the market growth drivers in more detail, we see that the rise in demand for SaaS and cloud is a key driver of spend across all our clients, from tier 1 and 2 banks through to the challengers and new entrants to the banking services market. All of our clients are seeking to benefit from utilizing cloud infrastructure and this is feeding into growing demand, with spend on 3rd party SaaS expected to grow at around 34% per annum for the next few years. We are seeing this impact both in terms of the very strong growth in our SaaS revenue, but also in the growth of our subscription revenue. We launched our transition to a subscription model at the start of 2022, which has significant benefits for our clients in terms of flexibility of the consumption model and the lower upfront cash outlay compared to traditional term licenses. For Temenos, not only do we capture a value uplift from the move to subscription, but the subscription transition is also accelerating our move to a more recurring revenue model, with greater visibility on profit and free cash flow in the mid-term.
The transition to subscription does have an impact on our cash flow, as we collect less cash upfront compared to a traditional term license contract. However, this is offset by a positive working capital impact from the growth in our SaaS revenue which is larger than the corresponding negative impact from the shift to subscription because of the size and growth of our SaaS business. Like-for-like, we collect and book more revenue for a SaaS contract than subscription, because of the additional services we are selling alongside the software. This means that we already reached the minimum point in our free cash flow generation in 2022 and are forecasting a strong acceleration in free cash flow from 2023 onwards.
Values and leadership
As I am sure you are aware, we announced a number of governance changes in January 2023. Max Chuard stepped down as CEO and I took on the role of acting CEO in addition to my Chairman responsibilities. I am grateful to Max for his 20 years of service to Temenos.
I will not be standing for re-election to the Board of Directors at this year’s AGM and, as such, this is my last Chairman’s letter to shareholders after 24 years in leadership positions with Temenos and 12 years as Chairman of the Board. The Board is in the process of seeking a new CEO, looking at both external and internal candidates, and I am confident they will find a suitable successor to take on the role and drive the growth of Temenos in the future. We expect this process to be complete by the end of 2023 and, once complete, I will hand over my CEO responsibilities as well. We are fortunate to have great strength and depth in the skills of our Directors and have proposed Thibault de Tersant to take over the role of Chairman of the Board. Thibault is an incredibly experienced software Executive and Board Director and is an outstanding choice to lead the Board and Company going forward.
I discussed our values earlier in this letter and the senior management team we have in place is the embodiment of these values. We have built these values over the last 29 years and they will be just as critical for the leadership of the Company over the years to come. Our senior management are some of the best in the banking software space and I know the business is in very capable hands, with a team that will support whoever is brought in as the next CEO.
I firmly believe Temenos will continue its very successful journey and look forward to seeing the Company go from strength to strength in the future.