Guidance for recurring revenue growth and conversion of 100% of IFRS EBITDA into operating cash reconfirmed; FY EBIT guidance revised to broadly flat year-on-year to reflect deals converted from license to SaaS ACV and accelerated investment in SaaS and cloud
GENEVA, Switzerland, October 15, 2020 – Temenos AG (SIX: TEMN), the banking software company, today reports its third quarter 2020 results.
Q3 2020 highlights
- Strong growth in recurring revenue and operating cash flow
- Underlying sequential improvement in Q3, Q2 was the trough
- A number of Transact license deals for c. US$16-18m converted from license to SaaS in the quarter, generating incremental SaaS ACV of c. US$7m
- Covid-19 is accelerating demand for SaaS with SaaS ACV up 108% in Q3
- Signed the largest ever ACV deal to date, for Transact in the US
- SaaS expected to start cannibalising some licenses going forward
- Strong new pipeline activity for on-premise licenses also continued in Q3 with good growth year-on-year
- Deals that did not sign year-to-date continue to be delayed, not cancelled, with delayed deals from both Q1 and Q2 closing in Q3
- 17 new client wins in Q3 across products
- EBIT returned to growth in Q3 with further improvement expected in Q4
- Steady improvement in operating environment expected in Q4 and return to growth in 2021
- Accelerating investment in SaaS and cloud and R&D to extend product advantage
- Guidance for recurring revenue growth of at least 13% reconfirmed, revised guidance for EBIT now to be broadly flat year-on-year, to reflect deals converted from license to SaaS ACV and accelerated investment in SaaS and cloud
Q3 2020 financial summary (non-IFRS)
- SaaS ACV growth of 108% c.c.
- SaaS revenue growth of 61% c.c.
- Non-IFRS total software licensing revenue down 23% c.c.
- Non-IFRS maintenance growth of 8% c.c.
- Non-IFRS recurring revenue growth of 16% c.c.
- Non-IFRS total revenue down 8% c.c.
- Non-IFRS EBIT up 4% c.c., Q3 EBIT margin of 39.1%
- Non-IFRS EPS flat y-o-y in Q3
- Operating cash flow of USD 63m, up 27%, LTM cash conversion of 119% of IFRS EBITDA
- DSOs at 111 days reported, down 12 days vs. Q3 2019
Commenting on the results, Temenos CEO Max Chuard said:
We have continued to focus on serving our clients’ needs remotely and I am very proud of all our employees and the way in which they have rapidly adapted and put our clients first. We had good underlying sequential improvement in Q3 and the second quarter was clearly the trough. Our EBIT also returned to growth this quarter. We expect steady improvement in the operating environment in Q4 as banks adapt to the new normal and refocus on their IT renovations.
We have seen a step-change in demand for SaaS in Q3, with a number of Transact deals converting from around USD 16-18m of licensing into USD7m of SaaS ACV. Our SaaS ACV pipeline has now grown 120% CAGR in the last 2 years and nearly 160% in the last 12 months.
We have maintained our very high levels of R&D productivity, which is critical for us to emerge stronger from the crisis. We are very well positioned for the transition to SaaS, having invested heavily in our SaaS and cloud capabilities over the last few years, and we will continue to do so to ensure we are the leader in our market for SaaS and cloud.
Covid-19 is accelerating the structural drivers in our market and I am confident we will return to growth in 2021 supported by the strong growth in our new deal pipeline.
Commenting on the results, Temenos CFO Takis Spiliopoulos said:
Signings in Q3 continued to be impacted by Covid-19, with an underlying sequential improvement from Q2. For the first time we saw clients proactively choosing to move from license to SaaS deals. Whilst this had an impact on our software license revenue in the quarter, we saw very strong growth in SaaS ACV which was up 108% and we expect this trend to continue going forward.
Recurring revenue growth was strong in the quarter, up 16%, ahead of our full year guidance of at least 13%. SaaS revenue grew 61% and Maintenance was up 8%. I am very pleased that the flexibility of our cost base and our tight grip on costs have returned Temenos back to profit growth with EBIT up 4%. We remain very focused on our cash flow generation and had a strong cash quarter, with operating cash flow of USD 63m, an increase of 27% and equal to a cash conversion of 119%. We ended the quarter with DSOs at 111 days reported, down 12 days versus Q3 2019. Our leverage remained at 2.6x net debt to EBITDA at the end of the quarter.
We are reconfirming our guidance for recurring revenue growth of at least 13% for the year. We now expect broadly flat EBIT driven by some deals converted from license to SaaS ACV and accelerated investment in SaaS and cloud in anticipation of sustained strong growth. We retain our operating cash conversion target of at least 100% and expect DSOs to be around 110 days at year end and leverage to be around 2x.
IFRS revenues were USD 209.4m for the quarter, a decrease of 8% vs. Q3 2019.
Non-IFRS revenue was USD 213.5m for the quarter, a decrease of 7% vs. Q3 2019.
IFRS total software licensing revenue for the quarter was USD 72.4, a decrease of 25% vs. Q3 2019.
Non-IFRS total software licensing revenue was USD 76.5m for the quarter, a decrease of 22% vs. Q3 2019.
IFRS EBIT was USD 55.9m for the quarter, a decrease of 9% vs. Q3 2019.
Non-IFRS EBIT was USD 83.5m for the quarter, a increase of 5% vs. Q3 2019.
Non-IFRS EBIT margin was 39.1%, up 5% points vs. Q3 2019.
Earnings per share (EPS)
IFRS EPS was USD 0.56 for the quarter, a decrease of 18% vs. Q3 2019.
Non-IFRS EPS was USD 0.90 for the quarter, flat vs. Q3 2019.
Operating cash flow
IFRS operating cash flow was USD 63m in Q3 2020 compared to USD 50m in Q3 2019, representing an LTM conversion of 119% of IFRS EBITDA into operating cash.
Revised 2020 guidance
The 2020 guidance is based on the assumption that the recessionary crisis due to COVID-19 had the largest impact in H1 2020, with steady improvement in our end market environment in Q4 2020 as banks adapt to the crisis. Our guidance for 2020 is in constant currencies.
The FY 2020 guidance is now as follows:
- Non-IFRS recurring revenue growth (SaaS and Maintenance combined) of at least 13%
- Non-IFRS EBIT broadly flat year-on-year
- 100%+ conversion of IFRS EBITDA into operating cash flow
- DSOs to be around 110 days at year end
- Expected FY 2020 tax rate of 14% to 15%
- Net leverage of c.2x by year end
Currency assumptions for 2020 guidance
In preparing the revised 2020 guidance, the Company has assumed the following:
- EUR to USD exchange rate of 1.17;
- GBP to USD exchange rate of 1.29; and
- USD to CHF exchange rate of 0.92.
At 18.30 CET / 17.30 GMT / 12.30 EST, today, October 15, 2020, Max Chuard, CEO, and Takis Spiliopoulos, CFO, will host a webcast to present the results and offer an update on the business outlook. The webcast can be accessed through the following link:
Please use the webcast in the first instance if at all possible to avoid delays in joining the call. For those who cannot access the webcast, the following dial-in details can be used as an alternative. Please dial-in 15 minutes before the call commences.
Switzerland / Europe: + 41 (0) 58 310 50 00
United Kingdom: + 44 (0) 207 107 06 13
United States: + 1 (1) 631 570 56 13
A recording of the call will be made available on the Company website shortly after the call. A transcript will be made available on the Company website 48 hours after the call. Presentation slides for the call can be accessed using the following link: https://www.temenos.com/en/about-temenos/investor-relations/results-and-presentations/.
Non-IFRS financial Information
Readers are cautioned that the supplemental non-IFRS information presented in this press release is subject to inherent limitations. It is not based on any comprehensive set of accounting rules or principles and should not be considered as a substitute for IFRS measurements. Also, the Company’s supplemental non-IFRS financial information may not be comparable to similarly titled non-IFRS measures used by other companies. In the reconciliation of IFRS to non-IFRS found in Appendix II, the Company sets forth the most comparable IFRS financial measure and reconciliations of this information with non-IFRS information. The Company’s non-IFRS figures exclude any deferred revenue write-down resulting from acquisitions, discontinued activities that do not qualify as such under IFRS, acquisition related charges such as advisory fees and integration costs, charges as a result of the amortisation of acquired intangibles, costs incurred in connection with a restructuring plan implemented and controlled by management, and adjustments made to reflect the associated tax charge relating to the above items.
Below are the accounting elements not included in the 2020 non-IFRS guidance:
- FY 2020 estimated deferred revenue write down of USD 13m
- FY 2020 estimated amortisation of acquired intangibles of USD 65-70m
- FY 2020 estimated restructuring costs of USD 25-30m
- FY 2020 estimated acquisition related credit of USD 20m related to Kony earn-out (reflected in Q2 actuals)
Restructuring costs include realizing R&D, operational and infrastructure efficiencies. These estimates do not include impact of any further acquisitions or restructuring programs commenced after October 15, 2020. The above figures are estimates only and may deviate from expected amounts.
Constant currency (c.c.) adjusts prior year for movements in currencies. SaaS ACV is Annual Contract Value which is the annual value of incremental business taken in-year. This includes new customers, up-sell and cross-sell. It only includes the recurring element of the contract and excludes variable elements