Temenos AG (TEMN) Earnings Call Transcript

Ladies and gentlemen, welcome to the Temenos Q3 2026 Results Conference Call and Live Webcast. I am Sandra, the Chorus Call operator. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it is my pleasure to hand over to Takis Spiliopoulos, CEO; and Daniel Schmucki, CFO. Please go ahead, gentlemen.

Good afternoon, good evening. Thank you for joining our Q3 '26 results call. Before we begin, I would like to introduce Daniel Schmucki, who joined Temenos as CFO in August. Daniel has a strong track record in building and leading high-performance teams in complex international businesses and is an excellent addition and strong partner for our executive committee and senior management. I am pleased to have him alongside me today. As usual, I will start with our key performance and operational highlights for the quarter before handing over to Daniel, who will provide an update on our financial performance. Starting on Slide 6. We had a strong start to the quarter, signing all flicked revenue from Q2. The sales environment remains stable throughout the third quarter with good underlying business momentum. Subscription and SaaS revenue growth was impacted by 1 large deal in Africa signing in the first days of Q4. This one deal would have resulted in subscription and sales growth above our guidance and consensus levels. We continue to strengthen our large deal execution capabilities to improve consistency. We have good visibility and a strong pipeline of deals into Q4, and we also had a robust start to the fourth quarter. We remain confident in achieving our 2026 subscription and SaaS guidance, and our focus is execution to close out the year strongly. Looking at the regional performance in Q3 '26 Europe performed particularly well, signing a number of deals, including with a global Tier 1 bank for its international operations. Importantly, we also saw strong sales performance in North America, with 4 new deals, including the U.S. regional bank deal we announced in July and a large deal in Canada. The Middle East also performed well with both new logos and existing customer deals across the Gulf region. The integration of Additive is progressing well with a new Tier 1 bank deal signed in APAC. I will cover more on additive shortly. We delivered very good growth in profitability in the quarter, driven by efficiency savings and good cost control and operating leverage. Free cash flow also continues to perform well, growing 24% in the quarter. Lastly, we have raised our 2026 EBIT growth and EPS growth guidance to 12% and 10%, respectively, and reconfirmed our other guidance metrics as well as our 2028 targets. Moving to Slide 7. We continue to see momentum with banks across geographies and tiers, both from existing customers extending their relationships with terminals and from new logos adopting Temenos for the first time. I would like to highlight a few of these deals. In Europe, we extended our core banking relationship with a Tier 2 corporate bank supporting their business as they continue their platform transformation. In the Middle East and Africa, we expanded an existing Tier 1 relationship with additional modules to enhance transaction processing capability. We also saw good momentum in the U.S. and Canada. In APAC, a Tier 1 bank selected us to modernize its digital wealth platform. The first Tier 1 deal we have signed in this space since the acquisition of additive in July. These are just a handful of dies we signed in the quarter, which demonstrates the breadth of our global client base and demand for our product across geographies and tiers. Moving to Slide 8. I would like to focus on 2 deals in particular that demonstrate the progress we are making with some of the world's largest financial institutions and this is driven by good execution against our product and technology road map, specifically for top-tier clients and our strategic sales focus on these institutions. Firstly, we signed a large deal with a U.S. headquartered Global Bank, expanding our relationship for international private banking. They are rolling out Temenos co-banking in their private banking operation across multiple geographies and this new deal adds additional capabilities and volume to expand the platform scope. It builds on the strong progress we made with this client over the past few years, and I would like to thank my colleagues across the business from product and technology to delivery and sales for their excellent work that made this possible. Secondly, as you may have seen from the press release yesterday, we announced a deal with Vancity to modernize their core banking platform. Vancity is the largest credit union in Canada, and they have big ambitions. The deal has a broad scope covering retail deposits, lending, corporate banking and payments and demonstrates the breadth and depth of our platform. Turning to Slide 9. I would like to highlight some recent client implementation successes. BSI is the largest Islamic bank in Indonesia, serving more than 23 million customers. They have been a Temenos customer for many years and choose to build on that investment by upgrading to the latest Temenos code. This was a significant transformation and shows how Temenos can help a large sophisticated bank modernize its core while creating the capacity and resilience to support future growth. Turning to Slide 10. Kingdom Bank is a specialist bank in U.K., which successfully went live with Temenos core payments and financial crime mitigation on Terminal South running on Microsoft Azure. By replacing siloed legacy systems with Temenos, the bank is streamlining operations, reducing manual processes and is able to scale more efficiently while continuing to provide the personalized service its customers expect. Moving to Slide 11. I would like to give you an update on additive following completion of the acquisition in July. We are deliberately taking a measured approach to the integration, maintaining stability for customers and the additive team, while integrating key corporate functions. The founder-led management team continues to run the business, which was part of the approach we set out when the transaction was completed. We have already integrated additive with Temenos core banking and we are now leveraging our global client relationships to grow the pipeline. We are seeing strong interest from Tier 1 and Tier 2 prospects, and we have already signed a new Tier 1 bank deal in APAC in Q3. This early traction reinforces the strategic rationale for the acquisition. It also complements our AI strategy through purpose-built, AI-enabled experience and orchestration which is increasingly important in helping banks automate processes and deliver personalized services at scale. On Slide 12, we continue to make good progress on our strategic execution priorities. Our product and technology leadership team is accelerating the road map and innovation delivery, and we continue to invest selectively in sales capabilities. In particular, to strengthen our large deal execution capabilities. This is a priority area for me to improve execution consistency in large deals and ensure they sign as planned going forward. We are also investing in key growth markets, including Brazil and Japan, where we are seeing good pipeline growth. Across the business, we are increasing automation and simplifying our processes and systems to drive further efficiency. AI is increasingly supporting this, and we are seeing tangible productivity benefits across our corporate product and technology functions. We remain focused in the balancing investment in the areas that support our growth with continued cost discipline. With that, I will now hand over to Daniel, who will take you through our financial performance for the quarter.

Thank you very much, Takis. This is my first results call since joining Temenos in early August, and I do look forward to meeting many of you over the coming weeks and months. As you can see on Slide 14, we delivered another strong quarter of ARR growth, up 12% to reach $904 million. This reflects continued demand across both our installed base and new logos. Product revenue grew 14%, driven by good underlying momentum across the business and continued strength in maintenance, which grew 7% in the quarter as expected. Turning to Slide 15. Subscription and SaaS grew 22% in the quarter. We signed all revenue that slipped from Q2 and our win rates remained strong throughout the quarter. However, as Takis talked about, Q3 subscription and SaaS revenue did not meet our expectations due to 1 large deal in Africa signing in the first week of Q4. Excluding the headwind from BNPL clients, subscription and SaaS grew 30% in the quarter. Q4 is the last quarter where we will face this headwind. Total revenue grew 13%, mainly driven by the subscription and SaaS revenue, but also strong contributions from maintenance and services revenue growth. Moving on to Slide 16. Non-IFRS EBIT was particularly strong this quarter, growing 26% and non-IFRS EPS grew by 32%. This reflects the good revenue growth in the quarter as well as efficiency gains, our continued disciplined approach to cost management and the operating leverage in the business. We continued to invest in our product and technology organization as well as go-to-market capabilities in selective growth markets and for large deals. Let me now highlight a few items on Slide 17. ARR grew 12% to reach $904 million, by the end of quarter giving us good visibility on future revenue and cash flow. Maintenance grew 7% in the quarter, which was in line with our expectations and reflecting good ongoing demand for premium maintenance across our customer base. Maintenance is tracking well, and we now expect it to grow 8% to 9% for the full year. On profitability, our EBIT margin improved by 4 percentage points year-on-year to 37.3%, reflecting strong operating leverage and benefits from our cost efficiencies. Moving to nonoperating items on Slide 18. Net profit and EPS both grew 32% in the quarter. Higher EBIT more than offset the increase in new finance charges. The quarter also benefited from a year-on-year improvement in FX rates. Our tax charge was broadly unchanged year-on-year, and we still expect the full year tax rate of 19% to 21%. On Slide 19, we generated free cash flow of $36 million in the quarter, up 24% year-on-year, driven by strong ARR growth, strong operating profitability and our disciplined approach to capital allocation. This remains a key metric for us as we continue to drive growth in our recurring revenue. This brings me to Slide 20, where we show the changes in group liquidity during the quarter. We generated $72 million of operating cash flow before tax expenses. We paid out $135 million of cash in the additive acquisition, which drove the increase in the net borrowings of $120 million, with the balance paid in shares. We also bought back $36 million of shares in the quarter. We ended the quarter with leverage of 1.6x, reflecting the acquisition of additive. Turning to Slide 21. A few comments on our debt, leverage and capital allocation. As we announced on the 12th of August, we launched a new share buyback program of up to CHF 100 million running until the end of February 2027 in line with our disciplined approach to capital allocation. Our reported net debt of $813 million primarily reflects the acquisition of Additive, partly offset by continued strong free cash flow generation. We expect leverage to be within our target range of 1 to 1.5x by year-end. Moving on to Slide 22. We have raised our full year guidance for non-IFRS EBIT growth of 12%, up from 9% and EPS growth of 10%, up from 7%. We reconfirm guidance of 12% ARR growth, 9% subscription and SaaS revenue growth and 16% free cash flow growth. This includes a marginal contribution from additive on ARR and subscription and SaaS. The guidance includes the headwind from the termination of the BNPL client in 2025, which we have given on that slide. As I mentioned, there will be no further headwind from this beyond 2026. And lastly, on Slide 23, we have reconfirmed our 2028 targets, reflecting our continued confidence in our strategic positioning, good visibility and continued conversion of our pipeline. This does not include any contribution from additive yet, and we plan to update these targets at our Q4 results announcement in February. Operator, please, can we open for questions.

[Operator Instructions] Our first question comes from Toby Ogg from JPMorgan.

Perhaps just on the subscription and SaaS. So yes, the indication was for at least 30%. We've got 22%. I know you mentioned the large deal in Africa slipping into Q4. But just to be clear, that was the only delta versus your initial expectations for at least 30%. And then can you help us understand just what happened with the deal that drove the slip versus your initial expectations for the deal closure? And then just one more -- just on the BNPL headwind. You mentioned subscription and SaaS would have been 30% ex the BMPL headwind. So an 8-point headwind versus the 22% growth I think the indication had always been that the BNPL headwind would be for 5 points for 2026. So could you just help us understand why that was larger in Q3.

Yes. Toby, thanks for the question. On your first one, yes, it was the one deal that drove the difference. And as we said, without that issue, we would have been comfortably ahead of what we had guided. Now what happened and clearly, you appreciate those large deals are sometimes a bit difficult to predict in terms of timing. So there were last-minute complications, let's say, on the legal side, which and some logistical challenges, which basically drove this a few days into October. It was a very unfortunate but that was the only one. And it was a very large deal, as you can see from the delta. Now on the only BNPL one, what we said is the impact is 5% on a full year basis, clearly, given its equal amounts from this BNPL client, which we have lost per quarter, but SaaS and subscription are different across the years, and this is where you see the gap. Yes. So for the full year, it remains -- clearly for the full year, the delta will be the smallest one.

The next question comes from Laurent Daure from Kepler Cheuvreux.

Yes. I have 2 questions. The first is for Daniel. I mean you've been on the job now, I think, for 3 months as the CFO. If you could share your first feeling on Temenos, if you're happy with the reporting tools that you have find when you joined the company. And if you see areas of improvement on the financial side. And my second question is more for you, Takis. I mean, basically, you're going to deliver better profitability on roughly unchanged revenue from what you were expecting earlier in the year. So what has driven the reduced cost expenses during the year that gets to a bit on the profitability side.

Thank you very much for the question. Looking back over the last couple of weeks and months, I was particularly impressed by First of all, the quality of the people here at Temenos, it's culture, Temenos' strategy, the strength of the product portfolio as well as its road map. The client relationships as well as the very disciplined execution attitude in the organization. And in combination of all these qualities, I do see a great deal of opportunities which lays ahead of us. A bit more focusing on finance. I did inherit a very strong finance organization with numerous talented and very motivated professionals. And I'm very convinced that I can bring in my experience as a former CFO of other large and complex multinational organization. And one of such opportunities is to continue to consequently adapt AI across all finance functions across the whole Temenos universe from data via workflow, via tools, et cetera and so on. So continuous improvement is part of my DNA, and I will contribute towards that direction also here at Temenos.

Laurent, I'm taking the second one. Looking at the original cost guidance we had given for Q3 and also the full year, we have now seen that we were able to drive a lot more efficiencies across our entire cost base. And if we look at Q3, and that also applies to Q4, these came primarily from organizational efficiencies in R&D, very disciplined approach to casting G&A and corporate functions. And clearly, what we always said, once you have real ownership across the business and people apply, managers apply what we call the self-funding principle, which we have been embedding that clearly shows very good results. But it's also -- we're now seeing tangible productivity gains from AI. And also, we continue to automate a lot of processes across the business, and this drives additional efficiency gains. So -- and this is without having any impact on investing. Actually, on the contrary, some of those efficiency gains are reinvested in our strategic road map. And clearly, there is a very disciplined approach. So overall, if you split the roughly 12 million increase in EBIT, you have maybe 2 million, 3 million coming from maintenance and services and the remaining 8 million, 9 million really from AI and automation efficiencies. And this is something which is sustainable. So the upside basically flowing into the EBIT guidance for the full year.

The next question comes from Charlie Brennan from Jefferies.

I'll try and sneak 2 in as well, if I can. Firstly, can you just say something about the competitive environment at the moment? I think on the Q2 call, someone focused on the Wells Fargo deal. I think in Q3, part of Deutsche Bank have gone to a competitor as well. Have you seen any change in competitive intensity or win rates that are worth calling out to us? And then secondly, maybe for you, Daniel, can you talk about whether you're revisiting any of the disclosures that you're providing the market I guess, the sort of topics that investors are debating are things like capitalized R&D that I see ticked up slightly in the quarter, the treatment of share-based payments and maybe revenue recognition around subscription revenue. Are these the same topics that you're thinking about all of these up for debate? Or are you thinking about completely different issues?

Charlie, yes, you're allowed 2 questions. First, on the competitive environment, we're aware of what the one competitor, it's not really a competitor because we haven't really squared up with them any time even not at Wells Fargo and Wells Fargo is not really in our target segment. If you think about the regional banking part Q2, Q3. We just had our annual strategy session with the Board. And we had actually very good win rates. If we look at the last 12 months, across most competitors. I think outside the U.S., I would still call out Infosys, Oracle. And yes, and maybe intellect to a certain extent, being most prominent. And in the U.S., it's still the 2 incumbents FIS and [ Python ]. For -- a few times, we squared off against new vendors, but very few times, obviously, we didn't see any impact there. Mostly, we don't see them on the short list. Now on -- and I'll let Daniel ask on the other one, you may have seen we actually lowered share-based compensation impact this year from 5% to 4% to 5%. And I think this will continue to move down on capitalized development, the net impact, the slight increase you have seen, this is just coming from inclusion of additive and nothing special, no change in policy to read in.

Charlie, thanks for your question. I am very comfortable with the level of disclosure and the way we disclose at Temenos. We do give a lot of details, including on [indiscernible], as well as on share-based costs. And my focus is more on how we can drive the finance function to be a good partner on the business.

The next question comes from Mark Hyatt from Morgan Stanley.

I'll continue the tradition and ask 2 questions, if that's okay. Firstly, I guess on margins, operating leverage so far this year has been very strong with EBIT running at a growth going well ahead of plan. I guess looking at your medium-term guidance, which you reiterated, the delta between EBIT growth and revenue growth is expected to narrow. You've talked a lot about AI savings and efficiency benefits. So could you just help us understand why we shouldn't expect operating leverage to continue beyond FY '26 at the pace -- at a similar pace that it has been? Or are you expecting increased investments over the medium term? And then maybe one, a more longer-term question perhaps. One of the things we've been hearing from perhaps other vendors in the enterprise software space is AI simplifying implementations, migrations and upgrades, are you seeing AI have a significant impact on the economics of making a core banking migration? And is this helping banks become more willing to undertake modernization projects? What's the evidence of that if you are seeing that?